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America 

AND  THE 

Balance  Sheet  of  Europe 


By 
JOHN  FOSTER  BASS,  LL.B.,  F.R.G.S. 

Author  of  "  The  Peace  Tangle  " 
And 

HAROLD  GLENN  MOULTON,  Ph.D. 

Author  of  "  The  Financial  Organization  of  Society,"  etc. 


NEW  YORK 

THE  RONALD  PRESS  COMPANY 

1921 


8(ril 
B3 


Copyright,  192 1,  by 
The  Ronald  Press  Company 


All  Rights  Reserved 


//  the  broken  countries  of  Europe  are  not  restored, 
even  the  states  still  solvent  will  slip  one  by  one  into  the 
general  ruin. — Right  Hon.  Reginald  McKenna, 
Chairman,  London  Joint  City  and  Midland  Bank, 
Ltd.;  ex-Chancellor  of  the  British  Exchequer. 


PREFACE 

Many  people  still  believe  that  present  disturbed  economic 
conditions  will  soon  be  adjusted,  that  problems  will  solve 
themselves — particularly  if  we  refuse  to  look  facts  in  the 
face  and  to  admit  that  conditions  are  serious.  It  is  urged 
that  business  is,  after  all,  merely  a  matter  of  psychology  and 
that  if  we  will  only  banish  pessimism  and  smile  confidently 
though  conditions  look  dark,  everything  will  shortly  auto- 
matically adjust  itself.  This  economic  hypnotism  is 
supposed  to  have  remarkable  restorative  powers  notwith- 
standing the  fact  that  such  things  as  the  foreign  exchanges 
and  national  budgets  have  hitherto  proved  impervious  to 
psychopathic  suggestion.  In  any  event,  it  is  believed  that 
time  is  still  the  great  healer  and  that  somehow  or  other  the 
world  will  blunder  through  to  "normalcy." 

The  purpose  of  this  volume  is :  first,  to  determine  the 
economic  and  political  status  of  Europe  at  the  present  time; 
second,  to  appraise  the  probable  effects  of  the  international 
settlements  (including  reparations)  that  have  recently  been 
made ;  and  third,  to  suggest  in  broad  outlines  an  international 
policy  such  as  it  is  believed  the  situation  demands. 

It  is  time  that  the  United  States  cease  drifting  with 
reference  to  international  affairs.  It  is  time  that  we  examine, 
in  a  spirit  of  scientific  inquiry,  the  international  economic 
and  political  situation  as  it  stands  today.  It  is  time  that  we 
attempt  to  ascertain  the  probable  results  of  recent  political 
and  economic  developments  in  Europe.  It  is  time  that 
through  study  and  discussion  we  begin  to  clarify  our  ideas 
and  to  formulate  an  American  foreign  policy — a  policy, 
moreover,  that  will  be  directed  not  merely  at  this  or  that  par- 
ticular issue  as  it  arises,  but  that  will  be  based  upon  a  con- 


VI  PREFACE 

sideration  of  the  entire  International  situation  conceived  as 
one  problem.  It  is  hoped  that  this  volume  may  contribute 
something  toward  a  clarification  of  the  issues  involved  and, 
if  ever  so  little,  toward  the  formulation  of  such  a  policy. 

The  authors  take  this  opportunity  of  expressing  their  in- 
debtedness to  the  host  of  people  who  through  discussion  and 
counsel  have  contributed  to  make  the  book  of  whatever  merit 
it  may  be.  We  are  particularly  indebted  for  the  information 
gathered  in  connection  with  the  London  meetings  of  the 
International  Chamber  of  Commerce.  In  view  of  the  rather 
striking  conclusions  that  we  have  reached,  it  has  proved  a 
comfort  to  know  that  they  are  shared  by  many  of  the  leaders 
of  European  economic  thought. 

John  Foster  Bass 
The  University  of  Chicago  Harold  G.  Moulton 

November  24,  1921. 


CONTENTS 

Part  I— The  Situation  as  It  Really  Is 

Chapter 

Page 

I 

Tests  of  European  Conditions     , 

I 

II 

The  Significance  of  Depreciated  Exchanges 

8 

III 

Is  European  Trade  Recovering?  . 

26 

IV 

National  Debts     ..... 

38 

V 

National  Budgets         .... 

47 

VI 

The  European  Monetary  Situation 

63 

VII 

The  German  Monetary  Collapse  . 

77 

VIII 

Conclusions  as  to  Present  European  Con- 

ditions    ...... 

88 

IX 

How  Long  Will  the  Depression  Endure  ? 

99 

X 

Economic  and  Social  Disintegration     . 

119 

XI 

The  Unity  of  the  Problem 

Part  II — The  Reparations  Dilemma 

140 

XII 

History  of  the  Reparations  Controversy 

155 

XIII 

Germany's  Ability  to  Pay     . 

177 

XIV 

How  Much  Are  the  Allies  Willing  to  Be 

Paid? 

203 

XV 

The  Economics  of  the  Reparations  Problem 

I    222 

XVI 

The  French-German  Rapprochement     . 

238 

XVII 

Political  Factors  in  the  European  Situation 

245 

XVIII 

Political  Factors  in  the  European  Situation 

(Continued) 

271 

Part  III — Remedies — Proposed  and  Real 

XIX 

The  Limitations  of  Foreign  Credits     . 

299 

XX 

The  Stabilization  of  the  International  Ex- 

changes   

319 

XXI 

The  Way  Out 

325 

vu 


America  and  the 
Balance  Sheet  of  Europe 

Part  I— The  Situation  As  It  Really  Is 


CHAPTER  I 

TESTS  OF  EUROPEAN  CONDITIONS 

Reversion  to  Isolation  Policy 

It  was  doubtless  inevitable  that  the  American  people, 
irritated  by  European  war  experiences  and  disillusioned  by 
the  terms  of  the  peace  settlement,  should  revert  to  the  tradi- 
tional policy  of  American  isolation.  It  is  just  as  inevitable, 
however,  that  under  the  compulsion  of  irresistible'  economic 
forces  the  pendulum  will  again  swing  in  the  opposite  direc- 
tion— toward  co-operation  with  Europe  in  the  solution  of 
post-war  problems.  Europe  as  the  controlling  element  in  the 
world  economic  situation  is  a  fact  which  simply  will  not 
down.  Regardless  of  the  decision  of  the  American  people  in 
last  year's  elections  against  further  European  entanglements, 
and  notwithstanding  the  more  recent  presidential  announce- 
ment that  the  first  and  most  important  task  of  the  present 
administration  is  that  of  tidying  up  our  own  dooryard,  the 
paramount  American  issue  of  the  next  four  years  will  be 
the  European  question.  We  can  afford  to  forget  about 
Europe  during  the  post-war  inflation  period  of  last  year; 
but  now  that  the  fateful  processes  of  economic  readjustment 
are  at  last  under  way,  we  shall  find  European  conditions 


2  THE  SITUATION  AS  IT  REALLY  IS 

will  largely  determine  American  conditions.  The  outstand- 
ing problem  of  the  world  today  is  the  formulation  of  a 
program  of  international  action  designed  to  prevent  progres- 
sive economic  and  social  decadence. 

The  striking  events  of  the  past  five  years  have  tended  to 
dull  the  apperceptive  qualities  of  mankind.  Events  are  daily 
chronicled  in  the  newspapers  which  would  have  shocked  the 
public  consciousness  five  years  ago;  but  they  now  pass  un- 
heeded by  a  public  whose  attention  has  been  jaded  to  satiety 
by  the  abnormal  events  of  the  war  and  of  the  years  that  have 
followed.  As  a  nation,  we  are  so  particularly  weary  of  all 
things  European  that  the  vast  majority  of  people  in  the 
United  States  now  refuse  to  give  European  afifairs  so  much 
as  a  passing  thought. 

Even  among  those  who  do  give  heed  to  international 
economic  conditions,  there  is  usually  a  tendency — born  of  a 
lack  of  understanding  of  the  complex  interrelations  of  the 
economic  organization  of  the  modern  world — to  seize  upon 
every  particular  development  or  manifestation  as  proof 
positive  that  conditions  are  distinctly  on  the  mend.  Such 
developments  are  all  too  often  mere  surface  phenomena, 
lulling  us  into  a  sense  of  economic  security,  while  under- 
neath, silently  but  irresistibly,  are  being  organized  the  forces 
of  economic  and  social  dissolution. 

Economic  Interdependence  of  Nations 

The  confusion  in  American  public  opinion  concerning  the 
economic  situation  in  Europe  and  its  relation  to  American 
conditions  is  one  of  the  most  serious  obstacles  to  world 
recovery  from  the  disastrous  effects  of  the  war.  If  con- 
structive assistance  in  the  re-establishment  of  world  finance 
and  world  commerce  is  to  be  rendered  by  the  United  States, 
we  must  first  understand  precisely  what  the  present  economic 
condition  of  Europe  is;  we  must  know  what  is  to  be 


TESTS  OP  EUROPEAN  CONDITIONS  3 

remedied  or  re-established.  And  if  the  support  of  this 
country  is  to  be  enlisted  in  any  comprehensive  plans  for  in- 
ternational, economic  reorganization,  the  rank  and  file  of 
people  must  first  be  given  a  clear  appreciation  of  the  bearing 
of  present  European  conditions  upon  conditions  within  the 
United  States;  they  must  be  made  to  realize  the  full  sig- 
nificance of  the  words,  "The  world  is  an  economic  unit; 
nations  are  economically  interdependent."  The  first  part  of 
this  volume  is  therefore  devoted  to  showing  the  true  eco- 
nomic status  of  Europe  today  and  the  probable  effects  of 
European  developments  upon  the  economic  welfare  of  the 
United  States. 

Diversity  of  Views 

As  a  matter  of  fact,  one  finds  alike  in  the  eflFervescent 
comments  of  returning  tourists  and  in  the  soberer  statements 
of  financial  and  economic  writers,  the  greatest  diversity  of 
view  as  to  present  conditions  abroad.  These  sharp  diflfer- 
ences  of  opinion  are  largely  to  be  explained  by  the  selection 
of  dififerent  facts  or  data  for  the  purpose  of  testing  condi- 
tions and  by  varying  interpretations  of  the  meaning  of  the 
data  selected.  When  the  economic  physician  attempts  to 
appraise  the  condition  of  diseased  Europe,  he  must  not  only 
look  for  the  symptoms  which  are  the  real  indexes  of  vital 
conditions,  but  must  also  be  able  to  give  balanced  weight  to 
each  and  to  distinguish  those  indicating  permanent  under- 
lying conditions  from  those  reflecting  nervous  shock  or 
temporary  exhilaration. 

Facts — admitted  facts — are  frequently  presented  as  con- 
clusive evidence  of  improving  conditions  when  in  reality  they 
are  merely  evidences  of  disordered  economic  life.  For  ex- 
ample, it  is  frequently  pointed  out  that  European  capitals 
were  never  more  gay,  never  more  luxurious,  or  never  more 
apparently  prosperous  than  now.    The  truth  is  that  the  more 


4  THE  SITUATION  AS  IT  REALLY  IS 

disorganized  is  the  currency  and  the  more  unsettled  are 
prices,  the  greater  is  the  tendency  to  wild  extravagance  and 
utter  disregard  of  values.  Examples  of  this  kind,  though 
quickly  forgotten,  are  frequent  in  history;  where  peoples 
drugged  with  illimitable  quantities  of  paper  money  have  ap- 
peared to  be  prosperous  and  have  continued  to  live  extrava- 
gantly almost  to  the  very  moment  of  monetary  and  economic 
collapse.  This  was,  of  course,  notoriously  the  case  in  the 
well-known  John  Law  paper  money  episode  in  France  in 
1719.  A  writer  of  the  time  states  :  "Plenty  displayed  herself 
through  all  the  towns  and  all  the  country  ...  in  a  word, 
riches  flowed  in  from  every  quarter;  gold,  silver,  precious 
stones,  ornaments  of  every  kind  which  contribute  to  luxury 
and  magnificence,  came  to  us  from  every  country  in 
Europe."  This  was  written  only  a  year  before  the  final 
collapse  of  the  famous  Mississippi  bubble. 

"Calamity  Boom" 

Again,  it  is  often  pointed  out  that  there  has  been  a  great 
rise  in  the  prices  of  securities  since  the  Armistice  and  that 
speculation  is  rampant,  particularly  in  Germany.  Once 
more,  the  truth  is  that  speculation  and  rising  security  prices 
are  directly  attributable  to  the  unsettlement  of  financial 
conditions  and  the  inflation  of  paper  currency.  One  is  re- 
minded, in  this  connection,  of  the  period  of  paper  money 
inflation  in  Revolutionary  France  in  1791,  which  ultimately 
culminated  in  financial  disaster.  Of  this  cataclysm,  the 
historian  White  writes :  "With  the  masses  of  the  people  the 
purchase  of  every  article  of  supply  became  a  speculation — 
a  speculation  in  which  the  professional  speculator  had  an 
immense  advantage  over  the  buyer.  Says  the  most  brilliant 
apologist  for  French  Revolutionary  statesmanship,  'Com- 
merce is  dead ;  betting  took  its  place.'  " 

While  speculation  in  some  European  countries  is  nov^ 


TESTS  OF  EUROPEAN  CONDITIONS  5 

less  rife  than  it  was  in  191 9-1 920,  in  others,  where  inflation 
has  continued,  it  is  now  more  rampant  than  ever.  At 
the  present  moment  Berlin  is  witnessing  what  is  there  known 
as  the  "Calamity  Boom,"  No  more  fitting  characterization 
could  be  given  to  the  skyrocketing  of  security  prices  which 
accompanies  the  outpouring  of  paper  currency  during  the 
period  preceding  the  inevitable  collapse  of  the  whole  tissue 
of  artificial  valuations. 

Misleading  Statistics 

Similarly,  statistics  showing  an  increase  in  national 
wealth  and  in  the  volume  of  trade  do  not  in  a  period  of  great 
price  changes  accurately  reflect  fundamental  economic  con- 
ditions. For  the  volume  of  trade  and  of  national  wealth  is 
computed  in  terms  of  money,  which  is  depreciating  in  pro- 
portion to  the  rise  of  prices.  A  sample  of  the  misleading 
conclusions  drawn  from  statistics  of  trade  expressed  in 
terms  of  depreciated  dollars  is  found  in  a  recent  statement 
in  a  prominent  financial  journal,  commenting  on  export 
trade  data  furnished  by  a  large  New  York  bank.  It  was 
stated :  "Exports  from  the  United  States  to  Germany  in 
the  fiscal  year  which  ends  with  June,  1921,  will  exceed  those 
of  any  year  prior  to  the  war  .  .  ,  they  will  be  of  greater 
value,  measured  in  good  American  dollars,  than  in  any 
year  in  the  history  of  our  trade  relations."  This  statement 
fails  to  take  into  consideration  the  great  rise  in  prices  that 
has  occurred.  If  allowance  is  made  for  this  fact,  German 
purchases  in  the  United  States  during  the  current  year 
(1921)  are  less  than  any  year  as  far  back  as  1900 — before 
the  so-called  "American  export  invasion  of  Europe"  began. 
When  one  of  the  greatest  banks  and  one  of  the  greatest 
financial  journals  in  the  United  States  will  thus  misread 
economic  data,  it  is  not  surprising  that  the  average  layman 
is  misled. 


6  THE  SITUATION  AS  IT  REALLY  IS 

The  absurdity  of  growing  excited  over  figures  of  expand- 
ing national  wealth  at  a  time  like  this  may  be  understood  if 
one  reflects  that  the  wealth  of  Russia  since  the  beginning  of 
the  war  has,  as  measured  in  present  Russian  money,  in- 
creased more  than  a  thousandfold.  Other  countries  differ 
from  Russia  only  in  degree. 

Statistics  which  show  the  huge  profits  earned  by  in- 
dustrial corporations  are  equally  untrustworthy  evidence  of 
economic  recovery.  A  period  of  monetary  expansion  and 
rising  prices  always  means  imposing  paper  profits,  largely 
obtained  through  the  process  of  buying  goods  at  one  price 
and  selling  them  at  an  advance.  In  Austria  goods  frequently 
pass  through  the  hands  of  fifteen  or  twenty  speculative 
middlemen,  each  selling  at  a  handsome  advance  above  cost. 
The  profits  are  thus  the  result  of  an  inflation  of  values  that 
carries  with  it  no  necessary  increase  in  actual  goods  pro- 
duced. In  Germany,  for  example,  the  receiver  of  paper 
money  dividends  four  times  as  large  as  pre-war  gold  divid- 
ends may  at  first  glance  appear  to  be  prosperous;  but  his 
real  poverty  is  revealed  when  he  goes  to  purchase  food,  etc., 
at  prices  from  ten  to  fifteen  times  the  pre-war  prices. 

Improvements  in  agriculture  and  in  food  conditions  are 
also  cited  as  conclusive  evidence  that  the  worst  of  Europe's 
difficulties  have  now  been  compassed.  Increasing  agri- 
cultural production  is  essential  to  world  recovery,  it  is  true ; 
but  it  is  not  the  determining  factor  in  world  prosperity. 
As  we  shall  see  in  the  following  chapters,  the  modern  world 
is  essentially  an  industrial  world  and  on  the  recovery  of 
industry  hangs  the  rehabilitation  of  civilization. 

Abatement  of  Social  Unrest  No  Index 

Furthermore  the  fact  that  social  or  industrial  unrest  is 
receding  in  this  or  that  particular  country  at  a  given  time, 
is  by  itself  no  conclusive  evidence  that  economic  recovery  is 


TESTS  OF  EUROPEAN  CONDITIONS  7 

a  thing  assured.  Unrest  may  be  lulled  into  momentary 
inactivity  by  fantastic  padding  of  government  pay-rolls,  by 
liberal  payments  of  pensions  and  unemployment  insurance, 
by  subsidies,  etc.,  as  has  been  the  case  in  nearly  every  country 
of  Europe.  It  may  be  temporarily  allayed  by  the  drugs  of 
monetary  inflation,  to  which  reference  has  already  been 
made,  as  has  clearly  been  the  case  in  Germany.  It  may  be 
held  in  leash  by  extravagant  governmental  promises  of 
reparations,  as  has  no  doubt  been  the  case  in  France.  It  may 
even  give  way  to  grim  despair,  as  has  been  the  case  in 
Austria.  Even  where  the  recession  of  unrest  may  fairly  be 
ascribed  to  a  recovery  from  the  neurasthenia  of  the  war 
era,  this  factor  by  itself  cannot  insure  prompt  economic 
readjustment.  The  mere  fact  that  the  German  or  the 
Italian  or  the  Belgian  people  may  now  be  showing  a  renewed 
disposition  to  work,  while  a  hopeful  sign,  by  no  means 
makes  it  certain  that  these  people  will  be  afforded  an 
opportunity  to  work.  There  are  millions  of  people  in  the 
United  States  today  who  are  now  willing  to  work,  whose 
hands  unfortunately  find  no  work  to  do.  The  same  con- 
dition exists  in  Europe. 

How,  then,  can  anyone  judge  whether  Europe  is  on  the 
highroad  to  economic  recovery?  What  are  the  economic 
guide  posts  that  reveal  the  true  situation?  If  one  is  to 
understand  the  economic  status  of  Europe  at  the  present 
time,  he  must  look  beneath  the  transient  surface  phenomena, 
and  read  the  lessons  contained  in  the  stories  of :  ( i )  the 
depreciation  of  the  international  exchanges;  (2)  the  foreign 
trade  statistics  of  the  several  European  nations  since  the 
Armistice;  (3)  national  debts  and  budgets;  and  (4)  the 
reserves  of  banking  systems.  These  are  the  true  indexes  of 
fundamental  underlying  conditions. 


CHAPTER   II 

THE  SIGNIFICANCE  OF  DEPRECIATED 
EXCHANGES 

Misunderstood  Problem 

Foreign  exchange,  by  means  of  which  the  trade  of  the 
world  is  conducted,  is  one  of  the  least  understood  phenomena 
of  commerce.  This  is  not  because  the  subject  is  inherently 
obscure  or  difficult,  but  only  because  in  normal  times  the 
exchange  mechanism  works  with  such  automatic  precision 
that,  save  to  a  few  special  students  or  dealers  in  exchange, 
it  appears  to  be  of  little  significance.  A  great  American 
merchant  confessed  to  the  authors  that,  although  for  years 
he  had  purchased  large  quantities  of  foreign  goods  and  paid 
for  them  with  bills  of  exchange,  not  until  after  war  dis- 
located the  exchanges  had  he  ever  taken  the  trouble  to  learn 
the  principles  determining  exchange  rates.  Even  now,  after 
two  years  of  disastrous  experience  with  exchange  gyrations, 
it  is  not  an  exaggeration  to  say  that  the  mass  of  business 
men  do  not  clearly  understand  the  forces  governing  ex- 
change fluctuations  and  the  significance  of  the  relative 
depreciation  of  the  exchanges  of  different  countries. 

Witness  the  persistent  purchasing  and  holding  of  German 
marks  by  thousands  of  speculators  throughout  the  world — 
speculators  who  possess  not  the  slightest  knowledge  of  the 
forces  that  will  ultimately  determine  the  value  of  German 
exchange.  Witness  the  astounding  statement  made  recently 
by  a  well-known  American  business  man  that  prior  to  the 
war  European  exchanges  fluctuated  as  much  as  they  do  now. 
Witness  the  equally  astounding  statement  of  a  French 
financier  that  the  depreciation  of  French  exchange  is  merely 
due  to  the  speculation  of  American  bankers. 

8 


DEPRECIATED  EXCHANGES  9 

The  whole  problem  of  international  trade  and  world 
recuperation  is  intricately  interwoven  with  the  functioning 
of  the  foreign  exchanges.  If  in  our  efforts  to  stem  the  tide 
of  economic  deterioration  and  restore  world  prosperity  we 
are  to  grapple  intelligently  with  the  problems  involved,  we 
must  begin  with  a  fairly  definite  notion  of  what  foreign 
exchanges  are  and  what  fundamental  forces  control 
them. 

Exchange  Explained 

The  conclusion  to  which  an  analysis  of  the  foreign  ex- 
change mechanism  leads  is  that  the  depreciation  of  the 
exchanges  of  the  various  European  countries  roughly  reflects 
the  economic  deterioration  of  each.  Now  to  understand  why 
this  is  so  it  is  necessary  to  consider  not  only  what  the  ex- 
changes are,  but  also  what  undepreciated  exchanges  mean 
and  how  in  ordinary  times  before  the  war  the  exchanges 
were  kept  from  depreciating.  Only  by  so  doing  can  one 
come  to  appreciate  the  enormous  significance  of  the  disrup- 
tion of  international  trade  and  finance  that  was  wrought  by 
the  war. 

Exchange  between  the  United  States  and  Great  Britain 
before  the  war,  for  example,  was  said  to  be  at  par  when  a 
one-pound  British  sterling  bill  was  worth  $4,866  in  New 
York.  What  did  par  or  parity  of  exchange  mean,  and  how 
was  this  quotation,  4.866,  derived?  Parity  of  exchange 
was  only  a  simple  statement  of  the  relative  quantities  of  gold 
in  the  American  gold  dollar  and  in  the  British  gold  pound. 
The  British  monetary  unit,  the  gold  pound  sterling,  has 
4.866  times  as  much  gold  as  the  American  monetary  unit, 
the  dollar.  To  cite  other  exchanges,  the  par  between  the 
United  States  and  France  is  19.3,  which  means  that  the 
gold  franc  is  worth  19.3  cents.  Belgium,  Italy,  Switzer- 
land, and  Greece  have  coins  of  exactly  the  same  value  as  the 


lO  THE  SITUATION  AS  IT  REALLY  IS 

French  franc,  and  thus  have  the  same  parity  with  United 
States  money.  The  German  gold  mark  is  worth  23.8  cents. 
The  gold  coin  of  each  of  the  various  countries  thus  has  its 
particular  parity  as  compared  with  United  States  gold,  and 
in  turn  the  gold  pound  sterling,  franc,  etc.,  each  has  its  parity 
with  the  coins  of  all  the  other  countries. 

Bills  of  exchange  largely  obviate  the  necessity  of  ship- 
ping currency  in  settling  international  obligations.  The  use 
of  bills  of  exchange  in  international  transactions  can  best  be 
revealed  by  some  concrete  illustrations. 

Assume  that  you  are  a  New  York  exporter  and  that  you 
have  sold  £1,000  worth  of  shoes  to  one  Perlmutter  in 
London.  At  the  same  time  your  friend  Jones  in  New  York 
has  bought  £1,000  worth  of  lace  from  a  well-known  London 
lace  merchant,  one  Potash.  If  you  could  then  step  over  to 
your  friend  Jones's  office  and  receive  payment  of  £1,000 
from  him,  while  at  the  same  time  Perlmutter  in  London 
was  paying  Potash  £1,000,  both  obligatiojis  would  be  settled. 
How  much  easier  this  would  be  than  for  Perlmutter  to  ship 
£1,000  in  specie  across  the  ocean  westward  to  you,  and 
for  friend  Jones  to  ship  another  £1,000  in  specie  across  the 
ocean  eastward  to  Potash. 

The  exchange  mechanism,  in  fact,  makes  it  possible  to 
settle  such  international  obligations  without  shipping  specie 
every  time.  If  you  in  New  York  were  to  draw  an  order 
(bill  of  exchange)  on  Potash  in  London,  instructing  him 
to  pay  Perlmutter  £1,000;  if  you  then  sold  this  bill  of  ex- 
change to  your  friend  Jones,  you  would  receive  payment  for 
your  shoes.  Then  if  Jones  should  send  this  bill  of  exchange, 
which  he  had  purchased  from  you,  to  Potash  in  payment  for 
the  lace,  Potash  would  be  satisfied  as  soon  as  he  had  collected 
from  Perlmutter.  Thus  the  shoes  and  the  lace  would  be  paid 
for  without  any  necessity  for  shipment  of  specie  across  the 
ocean. 


DEPRECIATED  EXCHANGES  tl 

Foreign  Exchange  Banker 

But  in  practice  there  are  usually  two  difficulties  which 
slightly  complicate  the  process.  In  the  first  place,  the 
various  parties  concerned  may  not  all  be  acquainted  with 
each  other.  Secondly,  the  amounts  involved  in  the  two 
transactions  may  not  be  identical,  as  was  supposed  above. 
Accordingly,  dealers  in  foreign  exchange  (banks  and 
brokers)  are  required  as  financial  intermediaries.  When  the 
exporter  in  New  York  draws  his  bill  of  exchange  for  £i,ooo 
on  the  importer  in  London — or  more  frequently  on  a  London 
bank  which  has  agreed  to  lend  its  name  to  the  importer  for 
the  purpose — the  exporter  in  New  York  sells  the  bill  to  a 
foreign  exchange  banker  in  New  York  who  will  pay,  when 
exchange  is  at  par,  $4,866.  This  banker  then  sends  the  bill 
to  a  correspondent  bank  in  London  which  presents  it  for 
payment  to  the  London  importer,  or  to  his  bank.  The  funds 
received  are  deposited  in  the  London  bank  to  the  credit  of 
the  New  York  bank  which  had  forwarded  the  bill  for 
collection. 

Now  when  your  friend  Jones  in  New  York  wants  to  buy 
a  bill  of  exchange  with  which  to  pay  for  the  lace  bought 
from  Potash,  he  goes  to  the  foreign  exchange  banker  in 
New  York,  and  the  banker  sells  him  a  bill  of  exchange 
drawn  by  it  against  this  London  bank  account — a  bill  for 
ii.ooo  or  for  whatever  amount  the  buyer  may  desire.  Jones 
then  sends  this  bill  of  exchange  to  Potash,  in  London,  who 
presents  it  for  payment  to  the  bank  against  which  it  is 
drawn. 

In  this  manner  the  New  York  banker  plays  the  part 
of  an  intermediary  between  New  York  exporters  and 
importers,  serving  in  effect  to  bring  them  together,  and 
serving  also  to  make  "change,"  that  is,  to  break  up  bills 
of  exchange  into  whatever  denominations  may  be  found 
necessary. 


12  THE  SITUATION  AS  IT  REALLY  IS 

Rate  Fluctuations 

Exchange  will  be  at  par  when  the  supply  of  and  the 
demand  for  bills  of  exchange  are  equal.  The  price  of  a 
bill  of  exchange,  like  the  price  of  wheat  or  any  other  com- 
modity, depends  upon  the  relative  demand  for  and  supply  of 
bills  in  the  market  at  the  moment.  If  at  any  given  time 
ii, 000,000  worth  of  American  products  have  been  exported 
to  Great  Britain,  there  will  be  i  1,000,000  worth  of  bills  on 
London  offered  for  sale  in  New  York.  If  at  the  same  time 
£1,000,000  worth  of  goods  have  been  imported,  there  will 
be  a  demand  for  i  1,000,000  of  bills  of  exchange.  The 
supply  and  demand  will  be  equal  and  the  price  of  sterling 
exchange  will  be  at  par,  that  is,  at  4.866.  But  if  it  happens 
that  while  f  1,000,000  worth  of  bills  is  oflFered  in  the 
market  for  sale,  as  much  as  £1,200,000  is  demanded,  the 
price  will  be  bid  up  above  4.866  by  those  who  desire  the  bills 
as  a  means  of  meeting  their  obligations  abroad.  On  the 
contrary,  if  only  £500,000  is  demanded,  the  sellers  will  have 
to  make  concessions  in  order  to  dispose  of  their  bills. 

Exchange  rates  before  the  war  normally  fluctuated  within 
narrow  limits.  The  maximum  extent  to  which  (under 
normal  pre-war  conditions)  the  price  of  exchange  could  be 
bid  up  or  forced  down,  as  the  case  might  be,  was  determined 
by  the  costs  involved  in  shipping  the  actual  gold.  One 
would  be  willing  to  pay  $4,866  for  a  bill  of  exchange  with 
which  to  settle  a  i  1,000  obligation,  because  that  would  be 
cheaper  than  shipping  the  gold.  One  would  be  willing  to 
pay  as  high  as  $4,885,  under  normal  conditions,  for  such 
a  bill ;  but  not  more  than  that  because  it  would  be  cheaper 
to  ship  the  actual  specie  instead.  On  the  other  hand,  it  would 
be  profitable  to  sell  a  £1,000  bill  for  $4,845 ;  but  not  for  less, 
since  it  would  be  cheaper  to  pay  the  expense  of  importing  the 
actual  currency.  These  points,  4.885  and  4.845,  are  known 
as  gold-exporting  and  gold-importing  points. 


DEPRECIATED  EXCHANGES  13 

The  International  Scale-Pans 

The  supply  of  and  demand  for  bills  of  exchange  do  not 
depend  merely  upon  the  relative  volume  of  exports  and 
imports  of  commodities.  Whatever  the  occasion  for  remit- 
tances of  funds  to  Great  Britain,  bills  of  exchange  are 
demanded,  and  whatever  the  occasion  for  payments  to  the 
United  States,  bills  of  exchange  are  supplied.  For  instance, 
if  an  individual  is  contemplating  a  trip  abroad  he  places, 
say,  $4,886  with  a  bank,  express  company,  or  one  of  the 
tourist  concerns,  and  asks  for  letters  of  credit  or  travelers' 
checks.  It  then  becomes  necessary  for  the  bank  where  the 
funds  have  been  deposited,  to  transmit  means  of  payment 
to  the  other  side.  This  it  does  by  buying  a  bill  of  exchange 
which  it  sends  to  a  correspondent  bank  in  Europe,  where 
it  is  credited  to  the  account  of  the  American  bank,  and  made 
available  for  the  payment  of  checks  when  properly  signed 
by  the  authorized  party.  Similarly,  if  an  American  corpora- 
tion owes  dividends  to  a  stockholder  in  England,  it  buys 
and  remits  a  bill  of  exchange. 

The  operations  which  give  rise  to  the  total  supply  of 
and  demand  for  bills  of  exchange  may  be  shown  by  an 
exhibit  of  the  international  financial  status  of  the  United 
States  in  a  single  year  before  the  war.  The  following 
figures  are  for  the  year  1909.  The  items  listed  in  the  left- 
hand  column  give  rise  to  a  supply  of  bills  of  exchange  and 
those  in  the  right-hand  column  to  a  demand  for  such  bills. 

Requiring  Payments  to  United  States  Requiring  Payments  Abroad 

Exports   of  merchandise  Imports   of  merchandise 

and  silver $1,719,000,000  and  silver $1,356,000,000 

Exports  of  gold  (net)  ....             48,000,000        Interest  on  European  in- 
vestments in  U.  S 250,000,000 

Tourist  expenditures. .  . .  170,000,000 

Remittances  to  friends. ..  150,000,000 

Freight  charges 25,000,000 

Grand  total $1,767,000,000  $r,95ii00o,ooo 

Balance  against  United  States $184,000,000 


14  THE  SITUATION  AS  IT  REALLY  IS 

It  should  be  carefully  noted  that  our  exports  abroad  were 
largely  paid  for  by  imports  of  foreign  goods.  No  gold  was 
received  in  payment;  on  the  contrary,  we  exported  on 
balance  $48,000,000  of  the  precious  metal.  The  difference  in 
the  trade  balance  (between  exports  and  imports  of  mer- 
chandise and  silver)  amounting  to  $363,000,000,  plus  the 
$48,000,000  of  gold  exports,  was  more  than  offset  by  other 
items  in  the  international  scale-pans.  We  owed  interest  on 
European  investments  in  the  United  States;  our  tourists 
were  entertained  in  Europe;  immigrants  and  others  sent 
funds  to  friends  abroad ;  and  we  owed  foreign  ship-owners 
for  transporting  our  goods.  The  final  outcome  of  all  these 
operations  showed  a  balance  of  $184,000,000  still  to  be 
accounted  for.  This  might  have  been  settled  by  an  exporta- 
tion of  gold ;  but  it  was  in  fact  offset  by  new — permanent  or 
temporary — investments  in  the  United  States  by  other 
countries. 

Gold  Movements 

The  United  States  will  thus  have,  in  any  given  year,  a 
net  inflow  or  net  outflow  of  gold  as  a  result  of  variations 
in  the  supply  of  and  demand  for  bills  of  exchange  arising 
from  trade  and  financial  operations  with  all  the  world. 
The  simplified  treatment  which  we  have  presented  ignores 
such  factors  as  "finance,"  as  distinguished  from  "trade" 
bills.  Nor  is  mention  made  of  roundabout  operations 
involving  several  countries.  These  three-cornered  opera- 
tions play  an  important  part  in  minimizing  the  flow  of 
specie  in  the  settlement  of  international  obligations.  But 
the  essence  of  the  problem  is  revealed  in  the  analysis  stated 
above. 

The  mechanism  of  the  exchanges  makes  it  unnecessary 
for  any  country  to  ship  specie  except  when  the  total  of  al' 
foreign  financial  obligations  that  must  be  met  is  greater  than 


DEPRECIATED  EXCHANGES  15 

the  volume  of  remittances  of  every  kind  due  it.  International 
obligations  are  thus  largely  canceled;  currency  moves  only 
as  a  last  resort.  Foreign  exchange  quotations,  moreover,  in 
ordinary  times,  fluctuate  only  from  the  gold-exporting  to 
the  gold-importing  point,  that  is  to  say,  in  terms  of  British 
currency,  from  4.885  to  4.845. 

Currency  movements  maintain  the  equilibrium  of  the 
exchanges.  Under  normal  circumstances  it  is  impossible 
for  an  outflow  of  specie  from  any  country  (except,  of 
course,  from  a  gold-producing  country)  to  continue  for  any 
great  length  of  time.  The  reason  for  this  is  that  such  an 
outflow  is  soon  followed  by  financial  and  trade  readjust- 
ments, which  shortly  restore  the  balance  of  international 
obligations.  An  outflow  of  gold  from  the  United  States  to 
England,  for  example,  would  reduce  the  volume  of  funds 
in  New  York,  and  lead  to  higher  interest  rates  there.  The 
inflow  of  funds  to  the  London  banks  would  at  the  same 
time  tend  to  lower  interest  rates  in  England.  In  conse- 
quence, international  bankers  would  find  it  profitable  to 
transmit,  by  means  of  bills  of  exchange,  funds  from  Lon- 
don to  New  York.  This  would  serve  to  restore  the  equili- 
brium of  the  exchanges  and  to  prevent  a  further  outflow 
of  gold  from  New  York,  if  not  to  bring  about  a  reverse 
movement. 

Variations  in  exchange  rates  above  or  below  parity  thus 
reflect  temporary  fluctuations  in  the  supply  of  and  demand 
for  bills  of  exchange  arising  from  international  financial 
transactions  of  whatever  nature.  And  gold  movements 
serve  as  the  corrective  for  any  pronounced  excess  or  de- 
ficiency in  the  supply  of,  as  compared  with  the  demand  for, 
bills  of  exchange  in  any  particular  country.  In  this  manner 
the  gold  movements  act  as  a  balance  wheel  in  interna- 
tional economic  relations,  keeping  the  world  in  economic 
adjustment. 


I6  THE  SITUATION  AS  IT  REALLY  IS 

Disruption  of  Exchange  Mechanism 

The  World  War  quickly  threw  this  delicately  adjusted 
foreign  exchange  mechanism  completely  out  of  gear.  In 
the  autumn  of  1914  there  was  a  great  rush  on  the  part  of 
European  holders  of  American  securities  to  sell  them  back 
to  us  as  a  means  of  securing  the  funds  required  for  war 
purposes.  At  the  same  time  the  usual  autumn  exports  of 
our  cotton  and  other  prouducts  were  checked,  both  by  a 
temporary  decline  in  European  demand  and  by  the  fear  of 
German  raiders.  Insurance  rates  also  tremendously  in- 
creased, so  that  the  gold-exporting  point  no  longer  remained 
at  4.885.  So  great  was  the  demand  for  sterling  bills  as 
compared  with  the  supply,  that  British  exchange  rose  at  one 
time  as  high  as  $7. 

But  in  the  autumn  of  191 5  the  situation  was  sharply 
reversed.  When  Great  Britain  began  to  buy  great  quantities 
of  war  supplies  from  the  United  States,  the  supply  of 
sterling  bills  of  exchange  outran  the  demand,  and  exchange 
quickly  fell  to  the  gold-importing  point.  For  a  time  Great 
Britain  attempted  to  use  the  normal  method  of  correcting 
adverse  exchanges,  namely,  by  allowing  an  export  of  gold; 
but  this  had  shortly  to  be  abandoned  because  of  the  dis- 
astrous consequence  to  the  British  monetary  system  of  con- 
tinued large  exports  of  specie.  An  embargo  was  therefore 
placed  upon  exports  of  specie,  except  as  government  opera- 
tions might  require  it.  What  was  true  of  Great  Britain  was 
of  course  also  true  of  other  European  belligerents. 

The  balance  of  payments  continued  to  run  so  heavily  in 
favor  of  the  United  States  that  sterling  declined  to  4.48 — 
far  below  the  gold-importing  point.  With  the  normal  means 
of  correcting  depreciated  exchanges — that  is,  by  payments 
in  gold — perforce  abandoned,  exchange  rates,  under  the 
pressure  of  a  great  volume  of  exports,  could  fall  almost 
indefinitely.     During  the  war,  however,  the  British  and 


DEPRECIATED  EXCHANGES  17 

Other  European  governments  undertook  and  successfully 
accomplished  an  artificial  stabilization  of  exchange  rates — 
the  sterling  rate  being  "pegged"  at  4.765.  This  was  done 
through  purchase  of  exchange  by  the  British  government 
whenever  the  rate  dropped  below  that  figure.  At  the  same 
time  the  United  States  government  began  the  war-time  policy 
of  shipping  American  goods  abroad  on  credit.  Such  a 
method  of  regulating  the  exchanges  could  not  be  continued 
as  a  permanent  policy  after  the  war. 

Sharp  Decline  of  Rates 

In  order  to  restore  the  normal  functioning  of  the  interna- 
tional exchanges,  the  various  European  governments  in  the 
spring  of  1919  abandoned  the  artificial  policy  of  "pegging" 
the  exchanges,  and  shortly  thereafter  the  United  States 
government  ceased  making  further  loans  to  Europe.  But 
for  reasons  to  be  discussed  presently,  Europe  did  not  remove 
the  embargoes  on  gold  shipments;  hence  the  normal  cor- 
rective of  depreciated  exchanges  could  not  operate.  The 
results  of  the  international  economic  maladjustments  caused 
by  the  war  were  quickly  shown  in  a  sharp  fall  in  exchange 
rates  on  all  of  the  European  belligerents. 

What  students  of  the  international  exchange  mechanism 
had  long  foreseen  must  occur,  now  for  the  first  time  mani- 
fested itself  to  the  general  public.  In  the  summer  of  1919 
the  financial  press  daily  discussed  the  sensational  decline  in 
foreign  exchange ;  and  business  men,  with  a  practical  interest 
in  foreign  trade,  began  for  the  first  time  in  our  national 
history  to  interest  themselves  in  the  phenomenon  of  the  ex- 
changes. And  thousands  of  innocent  bystanders,  acting 
on  the  familiar  principle  that  what  goes  down  must  soon 
go  up  again,  speculated  heavily  in  francs,  marks,  and  kronen. 
They  are  still  pocketing  their  losses. 

The  explanation  of  the  present  depreciated  European 


I8  THE  SITUATION  AS  IT  REALLY  IS 

exchanges  is  In  reality  twofold:  It  is  due  in  part  to  the 
tremendous  changes  that  have  occurred  in  the  financial  and 
trade  relations  between  the  United  States  and  the  several 
European  countries — changes  which  have  transformed  the 
United  States  from  a  debtor  to  a  creditor  nation.  And  it  is 
in  part  attributable  to  the  fact  that  all  of  the  European 
nations  have  been  forced  to  abandon  the  gold  standard  for 
irredeemable  paper  money.  These  factors  must  be  con- 
sidered separately. 

International  Scale-Pans  Unbalanced 

The  changes  that  have  occurred  in  the  international 
financial  relationships  of  the  United  States,  a  result  of  the 
war,  may  be  best  shown  by  setting  oflf  against  the  items 
entering  into  the  international  balance  in  1909,  the  items 
entering  into  it  in  1919.^  The  figures  for  1909  are  the 
same  as  were  presented  on  page  13  above.  For  convenience 
they  are  repeated  here. 

Figures  for  1909 

Rbquirimg  Payments  to  United  States  Requiring  Payments  Abroad 


Exports  of  merchandise 

Imports  of  merchandise 

and  silver    .            ....      $1,719,000,000 

and  silver 

Ii 

Exports  of  gold  (net) . ..            48,000,000 

Interest  on  European  in- 

vestments in  U.  S 

250,000.000 

Tourist  expenditures .... 

170,000,000 

Remittances  to  friends .  . 

150,000,000 

Freight  charges  due  Eu- 

rope   

25,000,000 

Total $1,767,000,000 

$1 

,951.000,000 

Balance  against  United  States |i84,ooo,ooo 

*  These  figures  are  taken  from  Vanderlip  and  Williams,  "The  Future 
of  Our  Foreign  Trade,"  an  article  prepared  for  The  Review  of  Econo- 
mic Statistics,  Harvard  University  Committee  on  Economic  Research. 
The  year  1920  still  further  increased  the  disparity,  although  the  excess 
of  exports  was  not  so  large  as  in  1919. 


DEPRECIATED  EXCHANGES  19 

Figures  for  1919 

Requiring  Payments  to  United  States  Requiring  Payments  Abroad 

Exports  of  merchandise  Imports  of  merchandise 

and  silver $8,151,000,000            and  silver $3,993,000,000 

Exports  of  gold  (net)  .. .  368,000,000  Tourists  expenditures .. .             50,000,000 

Interest  on  American  in-  (  ^122,000,000  Remittances  to  friends..          300,000,000 

vestments  in  Europe. .  /    500,000,000 

Freight  charges  due  U.  S.  73,000,000 


$9,114,000,000  $4,343,000,000 

Balance  in  favor  of  United  States  ....     $4,771,000,000 

Changes  in  Trade  Balance  Items 

It  will  be  seen  that  nearly  every  item  entering  into  the 
international  balance  has  been  changed  during  the  war  in 
such  fashion  as  to  increase  the  supply  of,  and  reduce  the 
demand  for,  bills  of  exchange  on  foreign  countries.  The 
great  increase  in  exports  as  compared  with  the  increase  in 
imports  would  alone  have  congested  the  exchange  market 
and  forced  a  decline  in  the  price  of  bills  of  exchange.  But 
in  addition,  the  United  States  has  become  a  creditor  nation, 
with  the  result  that  the  $250,000,000  interest  formerly  pay- 
able by  us  to  Europe  has  been  wiped  out  and  replaced  by  an 
annual  interest  charge  against  Europe  of  $622,000,000.^ 
Europe  can  therefore  no  longer  use  interest  due  as  an 
offset  to  the  excess  of  imports;  she  must  rather  find  means 


'  The  $122,000,000  represents  the  estimated  interest  on  private  invest- 
ments and  credits  abroad ;  the  $500,000,000  is  5  per  cent  on  the 
$10,000,000,000  loaned  by  the  United  States  government  to  European 
governments.  Payment  of  this  is  being  indefinitely  postponed,  the 
annual  interest  charges  thus  being  added  to  the  principal.  It  has  been 
computed  that  by  1923  the  accumulated  amount  will  stand  at 
$12,350,000,000,  the  interest  charge  on  which  would  equal  at  5  per 
cent,  $617,000,000  annually.  In  addition  to  these  debts  owing  to  the 
American  government,  foreign  governments  owe  to  private  individuals 
in  the  United  States  approximately  $2,000,000,000.  (Financial  report  of 
the  American  Committee  to  International  Chamber  of  Commerce  meeting 
in  London,  June  26,  1921.) 

'  As  a  result  of  further  credit  extensions  since  1919,  this  figure  is 
now  considerably  larger. 


20  THE  SITUATION  AS  IT  REALLY  IS 

of  meeting  huge  interest  charges  due  against  her.^  Tourist 
expenditures  in  Europe  have  also  been  reduced.*^  And 
freight  charges  due  Europe  have  been  replaced  by  freight 
charges  due  to  the  United  States.  Only  a  single  item  in  the 
balance  has  changed  to  the  advantage  of  Europe,  namely, 
the  increase  in  remittances  to  friends  abroad.  It  should  be 
noted,  moreover,  that  the  export  of  gold  was  much  larger  in 
1919  than  in  1909.  All  but  one  of  the  elements  entering 
into  the  international  scales,  therefore,  worked  to  bring 
about  a  fall  in  exchange  rates — through  increasing  the 
supply  relatively  to  the  demand  for  bills  of  exchange. 

It  remains  to  be  noted  that  the  international  scale-pans 
for  the  year  1919  were  balanced  through  the  extension  of 
American  investments  abroad.  This  was  accomplished 
partly  by  the  sale  in  the  United  States  of  European 
securities;  but  much  more  largely  by  the  sale  of  goods  by 
American  exporters  on  credit.  That  is  to  say,  exporters 
shipped  goods  abroad  and  received  not  cash,  but  promises  to 
pay  at  some  not  distant  date  in  the  future.  Necessary 
renewals  of  these  credits  have,  however,  made  them  in  the 
nature  of  long-term  rather  than  short-term  credit  extensions. 
Meanwhile  the  exporters  have  borrowed  funds  with  which 
to  carry  such  export  credits  largely  from  the  commercial 
banks. 

Depreciated  Paper  Currency 

The  second  factor  instrumental  in  the  depreciation  of  the 
exchanges,  namely,  the  abandonment  of  the  gold  monetary 
standard  in  Europe,  while  not  so  generally  understood,  is 
even  more  easily  explained.    We  have  already  seen  that  the 


*  Interest.    This  is,  however,  temporarily  being  funded.     See  foot- 
note 3. 

*  The  years  1920  and  1921  have,  however,  shown  considerable  increase 
in  this  connection. 


DEPRECIATED  EXCHANGES  21 

normal  parity  of  exchange  is  an  expression  of  the  compara- 
tive quantities  of  gold  in  the  American  and  foreign  monetary 
units.  At  the  present  time,  however,  the  parity  of  exchange 
between  the  United  States  and  Great  Britain  is  not  4.866, 
for  the  reason  that  American  money  which  is  redeemable 
in  gold  and  is  therefore  the  equivalent  of  gold,  is  exchange- 
able only  for  British  paper  money,  which  is  not  redeemable 
in  gold  and  is  therefore  not  the  equivalent  of  gold.  Since 
all  of  the  European  countries  now  have  irredeemable  paper 
money,  the  parity  of  exchange  between  American  gold  and 
European  paper  currency  is  in  no  case  the  same  as  the  former 
parity  between  American  gold  and  the  gold  of  the  several 
European  countries.  In  fact,  strictly  speaking,  there  is  no 
longer  any  parity. 

Since  British  paper  money  has  depreciated  about  20  per 
cent  in  comparison  with  British  gold,  American  traders  and 
financiers  are  now  unwilling  to  exchange  $4,866  in  American 
gold  for  £1  in  British  paper  money. 

Foreign  exchanges  have  fallen  to  the  extent  that  the 
domestic  paper  currency  of  European  countries  is  now  worth 
less  than  gold.  With  reference  to  Great  Britain  this  is  a 
factor  that  is  probably  secondary  in  importance  to  the 
maladjustment  in  trade  and  financial  transactions,  since  the 
British  paper  currency  is  not  very  greatly  depreciated.  But 
with  reference  to  the  continental  countries,  particularly  those 
east  of  the  Rhine,  depreciation  of  the  paper  currency  is  the 
principal  cause  of  falling  exchanges. 

The  truth  of  this  last  contention  may  be  seen  from  the 
fact  that  while  the  trade  and  financial  relations  between  the 
United  States  and  the  central  European  countries  have  been 
far  less  unbalanced  than  between,  for  example,  the  United 
States  and  England,  the  depreciation  of  the  exchanges,  as 
will  be  seen  from  the  table  below,  is  far  greater  in  the 
central  European  countries. 


22 


THE  SITUATION  AS  IT  REALLY  IS 


Exchange  Depreciation 

The  following  table  gives  the  pre-war  normal  parities 
between  the  United  States  and  the  principal  European 
countries,  the  rates  one  year  ago,  and  the  present  quotations : 

Par  Aug.  3, 1931    Aug.  3, 1920 

Great  Britain  (sterling)    $4,866  $356  $364 

France  (franc)    19.3     cents  7.62  cents  7.35  cents 

Italy  (lira)    19.3  "  4.22  "  5.20  " 

Belgium  (franc)     19.3  "  7.32  "  8.07  " 

Germany  (mark)    23.8  "  1.22  "  2.20  " 

Austria  (krone)     20.3  "  .12  "  1.60  " 

Roumania  (leu)    19.3  "  1.25  "  2.56  " 

Czechoslovakia  (krone)    20.3  "  1.25  "  2.00  " 

Poland  (mark)    23.8  "  .05  "  .60  " 

Jugoslavia  (krone)    20.3  "  .56  "  1.35  " 

Denmark  (krone)     26.8  "  15.18  "  15.60  " 

Finland  (mark)     19.3  "  1.55  "  3.95  " 

Holland  (guilder)    40.2  "  30.50  "  33-10  " 

Sweden  (krona)    26.8  "  20.33  "  21.15  " 

Norway  (krone)    26.8  "  12.66  "  15.70  " 

Switzerland  (franc)    19.3  "  16.40  "  16.95  " 

Spain  (peseta)    19.3  "  12.75  "  15.25  " 

The  extent  of  the  depreciation  of  the  exchanges  mirrors 
in  a  rough  way  the  degree  of  general  impoverishment  and 
economic  retrogression  in  each  European  country.  And 
the  relative  depreciation  from  par  of  the  exchanges  of  the 
diflferent  countries  reflects  pretty  accurately  the  varying 
degrees  of  economic  deterioration  in  the  several  European 
countries.  Classified  in  broad  groups,  it  will  be  seen  that 
the  exchanges  of  the  neutral  nations  are  the  least  depreci- 
ated; those  of  the  Allied  belligerents  next;  and  those  of  the 
central  and  eastern  European  nations  most  of  all. 

During  the  past  year  ( 1 92 1 )  the  exchanges  on  every 
European  country,  except  France,  ®  have  declined.     Those 


"The  reasons  why  French  exchange  has  been  held  up  relatively 
to  the  others  is  discussed  on  page  91.  It  is  not,  however,  indicative  of 
genuine  improvement  in  French  conditions. 


DEPRECIATED  EXCHANGES  23 

on  the  countries  of  central  and  eastern  Europe  have  declined 
very  heavily ;  those  of  the  neutral  countries  considerably ;  and 
those  of  the  Allied  nations,  France  excepted,  somewhat. 
One  must  therefore  conclude  that  on  the  whole  the  foreign 
exchanges  indicate  a  European  situation  somewhat  worse 
this  year  than  last. 

Many  persons  have  been  misled  during  the  first  half  of 
192 1  by  rising  exchanges  that  were  merely  attributable  to 
seasonal  influences.  The  rates  of  the  winter  and  spring 
every  year  are  substantially  higher  than  those  of  the  summer 
and  autumn.  This  is  mainly  because  it  is  during  the  summer 
and  fall  that  our  exports  are  largest.  The  significant  thing  to 
note,  therefore,  is  that,  speaking  generally,  the  rates  this 
year  have  been  below  those  of  last  year  at  each  season  of  the 
year.  The  upward  movement  did  not  go  as  high  as  last 
year,  and  the  downswing  is  therefore  more  pronounced  than 
in  1920. 

Effects  of  Depreciated  Exchanges — i.  Risks  of  Trade 

The  depreciated  exchanges,  while  reflecting  the  economic 
decadence  of  European  nations  as  compared  with  the  United 
States,  at  the  same  time  also  act  as  a  deterrent  to  European 
economic  recovery.  There  are  two  ways  in  which  the 
instability  of  the  exchanges  impedes  foreign  trade  and  the 
economic  rehabilitation  of  Europe.  First,  it  greatly  increases 
the  risk  of  trading  operations  and  thus  operates  as  a  damper 
to  business  enterprise.  The  exchanges  fluctuate  widely  from 
month  to  month,  due  (i)  to  speculative  buying  or  selling 
of  exchange  in  anticipation  of  improving  or  worsening  con- 
ditions in  Europe;  (2)  to  changes  in  the  volume  of  trade 
and  other  international  transactions;  and  (3)  to  fluctuations 
in  the  value  of  the  irredeemable  paper  currency  of  the 
various  European  countries. 

Since  all  modern  business  is  organized  on  a  profit-making 


24  THE  SITUATION  AS  IT  REALLY  IS 

basis,  it  is  of  the  utmost  importance  that  business  men  be 
able  to  calculate  their  chances  of  profit  with  a  reasonable 
degree  of  certainty.  But  fluctuating  exchange  rates  mean 
great  uncertainty  as  to  the  value  of  the  money  ultimately 
received  in  payment  for  a  shipment  of  goods.  Contracts 
entered  into  on  the  basis  of  the  exchange  quotations  of 
January  i,  are  settled  on  the  basis  of  exchange  quotations 
some  months  later,  with  resulting  uncertainty  for  both 
parties  to  the  transaction.  The  greater  and  more  unpre- 
dictable the  fluctuations  in  exchange  rates,  the  greater  the 
hesitancy  to  undertake  the  fulfilment  of  time  obligations. 

2.  Curtailment  of  American  Exports 

The  second  way  in  which  depreciated  exchanges  impede 
the  economic  recovery  of  Europe  is  through  increasing  the 
cost  of  goods  purchased  in  the  United  States  and  other 
countries  whose  exchange  rates  are  relatively  high.  For 
example,  when  French  exchange  is  quoted  at  6.40,  it  is  worth 
only  about  one-third  of  its  normal  value  of  19.3.  This 
means  that  a  French  importer  has  to  pay  19.3  cents  for 
every  6.4  cents  worth  of  goods  received,  or  $3  for  every 
$1  worth  of  goods  bought  in  the  United  States.  This  would 
not  matter  if  prices  in  France  were  higher  than  those  in  the 
United  States  in  precise  proportion  to  the  depreciation  of 
French  exchange,  that  is  to  say,  if  the  $1  worth  of  goods 
bought  in  the  United  States  could  be  sold  in  France  for  $3, 
plus  profit.  But  such  is  not  precisely  the  case.  When,  for 
example,  at  the  worst  French  exchange  was  worth  only 
about  one-third  its  normal  parity,  French  prices  were  only 
about  double  American  prices. 

It  should  be  observed,  moreover,  that  since  French  ex- 
change is  less  depreciated  as  compared  with  British  than 
with  American  money,  it  pays  France  to  import  from  Great 
Britain  rather  than  from  the  United  States,  whenever  it  is 


DEPRECIATED  EXCHANGES  25 

possible  to  obtain  the  required  goods  there ;  and  inasmuch  as 
German  exchange  is  greatly  depreciated  even  as  compared 
with  the  franc,  France  can  buy  still  more  cheaply  in 
Germany.  Since  America  is  the  dearest  market  in  the  world, 
purchases  have  to  be  confined  to  the  minimum. 

While  this  situation  thus  threatens  our  export  trade,  it 
could  not  seriously  impede  the  recovery  of  Europe  were  it 
not  for  the  fact  that  European  countries  are  in  so  large  a 
degree  dependent  upon  American  imports.  Since  the 
Armistice  they  have  in  fact  been  buying  huge  quantities  of 
American  goods  on  credit,  but  at  a  very  heavy  cost  to  them- 
selves. As  we  shall  presently  see,  European  nations  have 
been  going  ever  more  deeply  into  debt,  without  having 
effected  any  substantial  recovery  from  the  effects  of  the  war. 
And  not  the  least  unfortunate  aspect  of  this  increasing  in- 
debtedness is  the  fact  that  so  considerable  a  portion  of  it 
was  contracted  in  the  purchase  of  non-essential  commodities 
during  the  period  of  the  post-war  luxury  debauch.  In 
view  of  the  psychological  effects  of  the  war  it  was  perhaps 
inevitable  that  we  should  pass  through  such  a  period.  Be 
this  as  it  may,  the  consequence  has  been  that  Europe  still 
stands  in  great  need  of  purchasing  certain  kinds  of  materials 
from  the  United  States.  But  Europe  is  on  the  whole  less 
able  to  make  these  purchases  now  than  it  was  at  the  time 
of  the  Armistice.  The  truth  of  this  statement  will  be  more 
fully  revealed  in  subsequent  chapters. 


CHAPTER  III 

IS  EUROPEAN  TRADE  RECOVERING? 

Favorable  Trade  Balance  Necessary 

The  enormous  disruption  of  the  trade  of  Europe  during 
the  war  was  roughly  portrayed  in  the  discussion  of  the  for- 
eign exchanges  in  the  preceding  chapter.  Exports  were  cur- 
tailed and  imports  were  tremendously  increased,  with  result- 
ing huge  adverse  trade  balances.  Early  in  the  war — it  bears 
repeating — the  excess  of  imports  was  paid  for  partly  in  gold 
and  partly  by  the  resale  to  the  United  States  of  European 
investments  in  this  country.  When  these  resources  were  ex- 
hausted Europe  borrowed  from  the  United  States,  that  is  to 
say,  we  shipped  the  goods  abroad  on  credit,  European  gov- 
ernments agreeing  to  pay  for  the  goods  at  some  future  date, 
after  the  war  was  over.  Meanwhile  the  United  States 
government  paid  the  exporters  with  funds  raised  from  the 
sale  of  Liberty  bonds.  At  the  time  of  the  Armistice  these 
government  credits  abroad  amounted  to  nearly  $9,000,000,- 
000.  They  have  since  been  increased  to  about  ten  billions; 
while  private  credits  amount  to  three  or  four  billions  more. 
The  United  States  has  thus  become  a  huge  creditor  nation. 

Now  if  Europe  is  to  retrace  her  steps,  to  restore  her  trade 
and  recover  her  financial  equilibrium,  she  must  gradually 
reduce  ^  imports  and  expand  exports.  An  individual  gets 
out  of  debt  by  paying  his  debts;  and  it  is  the  same  with  a 
nation.  But  a  nation  cannot  pay  large  debts  by  shipping 
money.  As  the  analysis  of  the  international  exchanges  in 
the  preceding  chapter  indicates,  nations  must  meet  their 

*  If  not  actually  reduce  imports,  at  least  expand  exports  until  th^ 
greatly  exceed  imports. 

26 


IS  EUROPiEAN  tRADE  RECOVERING?  27 

obligations  abroad  with  either  goods  or  services — usually  the 
former.    Hence  the  necessity  for  Europe  to  expand  exports. 

But  it  may  be  argued  that  it  is  unnecessary  for  Europe 
to  wipe  out  the  debt  completely.  May  she  not  remain 
permanently  indebted  to  the  United  States,  permanently 
paying  interest  on  borrowed  funds?  True,  but  at  least 
Europe  must  sooner  or  later  cease  to  go  further  into  debt; 
and  if  she  is  to  regain  financial  solvency  she  must  place  her- 
self in  a  position  where  she  can  at  least  pay  interest  on  the 
debt  which  is  owed.  This  can  be  accomplished  only  by  secur- 
ing a  large  favorable  balance  of  trade.  No  other  way  of  re- 
establishing economic  equilibrium  has  ever  been  invented. 

As  matters  now  stand  it  would  require  between  Europe 
and  the  United  States  an  excess  of  exports  over  imports  of 
about  $700,000,000  annually  to  meet  interest  charges  alone. 
And  if  we  assume  that  the  debt,  amounting  to  approximately 
$14,000,000,000,  is  to  be  paid  off  in  forty  years,  another 
$300,000,000  of  exports  would  be  required  annually  for 
sinking  funds. 

Slow  Progress  Made 

Let  us  now  enquire  what  progress  Europe  has  been  mak- 
ing toward  securing  this  necessary  favorable  balance  of 
trade.  It  was,  of  course,  not  to  be  expected  that  much,  if 
anything,  would  be  accomplished  in  the  first  year  following 
the  end  of  the  war.  The  prolongation  of  the  peace  negotia- 
tions, the  difficult  and  tedious  task  of  demobilization,  and 
the  economic  prostration  caused  by  the  war,  combined  to 
render  immediate  progress  impossible.  It  was  inevitable,  in- 
deed, that  Europe  should  plunge  still  further  into  debt,  in  or- 
der to  procure  the  raw  materials  necessary  for  reconstruction. 
Until  European  industries  should  be  restored  and  the  several 
nations  placed  upon  their  economic  feet,  so  to  speak,  it  was  of 
course  idle  to  look  for  a  return  to  a  favorable  trade  position. 


28 


THE  SITUATION  AS  IT  REALLY  IS 


But  nearly  three  years  having  passed  since  the  conclusion 
of  the  Armistice  agreement,  it  would  seem  that  sufficient 
time  has  elapsed  to  show  results.  But  even  now  little  progress 
is  to  be  recorded.  In  view  of  the  widespread  impression  that 
Europe  has  been  making  remarkable  progress  toward 
economic  rehabilitation,  the  following  tables  which  show 
the  trade  of  Europe  as  a  whole  with  the  United  States  are 
significant.  The  first  table  shows  the  trade  since  the  begin- 
ning of  1920  by  quarters. 

European  Trade  with  the  United  States 
(000,000  omitted) 

Exports  Imports  Balance  against 

1920  to  U.  S.         from  U.  S.  Europe 

1st  quarter  $344  $i,3i9  $975 

2nd       "  322  1,044  722 

3rd        "  325  948  623 

4th        "  237  1,070  833 

1921 

I  St  quarter  191  767  576 

2nd   "  185  529  344 

The  following  figures  show  the  monthly  trend  since  last 
autumn : 


(000,000  omitted) 

Exports  Imports           Balance  against 

1920                                    to  U.  S.  from  U.  S.  Europe 

November    $82  $357  $275 

December   67  389  322 

1921 

January  60  327  267 

February  55  243  188 

March  71  i99  I32 

April  69  174  lOS 

May  61  177  116 

June  55  178  123 


IS  EUROPEAN  TRADE  RECOVERING?  29 

If  one  studies  only  the  final  column  in  these  tables  he  may 
conclude  that  Europe  is  making  genuine  progress  toward 
trade  recovery.  Has  not  the  adverse  trade  balance  been 
materially  reduced  since  last  autumn?  This  is  in  fact  the 
conclusion  that  has  commonly  been  drawn  from  these 
foreign  trade  statistics. 

But  if  one  gives  heed  to  the  other  columns  as  well,  he 
will  find  the  explanation  of  the  decrease  in  the  adverse  trade 
balance  of  Europe,  not  in  a  great  increase  in  exports  and  a 
decrease  in  imports,  but  in  a  great  decrease  in  imports  ^ — 
exports  declining  also,  though  less  rapidly.  Attending  this 
great  reduction  in  imports  from  the  United  States  is  a  cor- 
responding decrease  in  production  in  Europe.  And — after 
a  brief  lag — this  results,  among  other  things,  in  a  further 
reduction  of  European  exports.  It  should  require  no  ex- 
tensive analysis  to  show  that  if  Europe  cannot  purchase 
American  cotton  and  other  raw  materials,  she  cannot  hope 
to  maintain  the  volume  of  her  exports  of  finished  com- 
modities. Only  in  slight  degree  is  the  decline  in  European 
imports  attributable  to  the  elimination  of  purchases  of  lux- 
uries and  non-essentials.  The  reduction  is  common  to  prac- 
tically all  lines ;  and  is  attributable  to  the  business  depression 
and  the  gradual  exhaustion  of  European  purchasing  power. 

British  Foreign  Trade 

The  above  figures,  however,  relate  only  to  the  trade 
between  Europe  and  the  United  States.  Is  it  not  possible 
that  there  has  merely  been  a  shifting  of  trade  ?  That  Ameri- 
can loss  has  been  the  gain  of  other  nations?  Statistics  of  the 
foreign  trade  of  leading  European  nations  with  the  world 

*Some  allowance  must  be  made  in  these  aggregate  figures  for  the 
fluctuations  in  prices  that  have  occurred.  That  the  decline  in  recent 
months  is  not  mainly  attributable  to  the  mere  decline  in  prices  is, 
however,  evident  from  the  fact  that  the  decline  in  trade  has  been 
rapid  since  the  rate  of  price  decline  began  to  slow  down. 


30 


THE  SITUATION  AS  IT  REALLY  IS 


as  a  whole  will  serve  at  once  to  answer  this  question  and  to 
reveal  the  precise  trade  situation  of  particular  countries. 
The  table  which  follows  shows  the  trend  of  British  trade 
since  June,  1918 : 

Great  Britain's  Foreign  Trade 
(£000,000  omitted) 


19 1 8  Exports 

3rd  quarter  £127 

4th        "  124 

1919 

1st  quarter  147 

2nd   "  187 

3rd   "  206 

4th   " 257 

1920 

1st  quarter  295 

2nd   "  342 

3rd   "  370 

4th    "  328 

1921 

1st  quarter  228 

2nd   "  141 


The  following  are  the  monthly  figures  for  British  trade 
since  the  autumn  of  1920 : 

(£000,000  omitted) 


1920  Exports 

November    £119 

December    97 

192 1 

January    93 

February    68 

March  67 

April     60 

May  43 

June*  38 

*  Preliminary  figtires,  subject  to  revision. 


Adverse 

Imports 

Balance 

^317 

£190 

350 

226 

347 

200 

370 

183 

450 

244 

467 

310 

530 

335 

S03 

161 

468 

98 

437 

109 

398 

170 

264 

123 

Adverse 

tnports 

Balance 

£144 

i^S 

143 

46 

"7 

24 

97 

29 

94 

37 

90 

30 

86 

43 

88 

SO 

IS  EUROPEAN  TRADE  RECOVERING?  31 

The  figures  of  adverse  balance  (in  the  final  column)  are 
here  also  less  significant  than  the  trends  disclosed  in  the 
other  columns.  During  1919  and  the  first  months  of  1920, 
both  exports  and  imports  increased.  While  British  students 
recognized  that  the  imports  remained  disappointingly  large, 
much  satisfaction  was  derived  from  the  steady  increase  in 
exports.  Great  Britain  appeared  to  be  headed  in  the  right 
direction.  But  in  the  summer  of  1920  the  tide  turned; 
both  exports  and  imports  began  to  decline.  The  persistency 
with  which  the  progressive  decline  has  been  maintained  is 
shown  by  the  monthly  figures  since  last  November.  The 
decline  began  long  before  the  coal  strike.  It  is  at  bottom  a 
reflection  of  the  world-wide  depression,  although  the  May 
and  June  figures,  of  course,  reveal  the  additional  disastrous 
consequences  of  the  cessation  of  coal  mining.  The  bottom 
was  probably  reached  in  June;  but  there  is  little  reason  to 
believe  that  the  figures  for  the  ensuing  months  will  greatly 
exceed  those  of  April. 

In  May,  1914,  British  exports  were  £42,000,000  and 
imports  £52,000,000,  leaving  an  adverse  balance  of  only 
£10,000,000.  Since  the  present  British  price  level  is  almost 
exactly  twice  that  of  191 4,  it  will  be  seen  that  the  present 
physical  volume  of  exports  is  only  about  half  what  it  was 
in  May,  1914,  while  the  present  physical  volume  of  imports 
is  nearly  equal  to  that  before  the  war.  The  present  exports 
are,  moreover,  scarcely  equal  to  those  of  the  spring  of  1918, 
when  the  war  strain  was  at  its  height. 

French  Foreign  Trade 

The  facts  as  to  the  foreign  trade  of  France  are  particu- 
larly interesting,  since  they  have  been  so  frequently  cited  of 
late  as  conclusive  evidence  that  France  is  rapidly  recovering 
her  foreign  trade  position.  The  following  figures  taken  from 
the  Federal  Reserve  Bulletin,  are  expressed  in  1919  value 


32 


THE  SITUATION  AS  IT  REALLY  IS 


units;  hence  the  fluctuations  revealed  are  those  which  took 
place  in  the  physical  quantities : 


(In  francs,  ooo  omitted) 

Exports 

1919,  monthly  average 989,966 

1920,  "  "      1,869,563 

1920 

August  2,399,508 

September    2,151,573 

October  2,332,552 

November    1,883,598 

December    1,660,896 

1921 

January  1,882,618 

February  1,899444 

March    1,686,426 

April    1,932,268 

May**    1,648,635 

June**    1,563,065 

*  Favorable  balance. 

**  The  May  and  June  figures   are   not    converted  to 
prices  now  are  about  the  same  as  in  19 19,  they  would  not 


Adverse 

Imports 

Balance 

2,983,272 

1,993,306 

2,950,413 

1,080,850 

2,800,453 

400,945 

2,627,876 

476,303 

2,595,445 

262,893 

2,672,178 

788,580 

2,948,257 

1,287,361 

1,982468 

99,850 

1,613,931 

♦285,513 

1,742,908 

56,482 

1,779,089 

*i53,i79 

1,565,508 

♦83,127 

1,723,534 

160469 

1919  values.     Since  French 
be  materially  altered. 


It  will  be  seen  from  the  last  column  that  the  "great  im- 
provement" came  at  the  beginning  of  1921.  It  is  these 
figures  of  the  French  trade  balance  that  have  been  so  widely 
circulated  as  conclusive  evidence  of  French  recovery.  Let 
us  see  how  much  significance  is  to  be  attached  to  them. 

Reference  to  the  imports  and  exports  columns  reveals  that 
the  big  change  in  trade  balance  that  occurred  in  January 
was  wholly  due  to  a  collapse  of  imports — from  2,948,257,000 
in  December,  to  1,982,468,000  in  January.  In  that  month  ex- 
ports also  fell  somewhat.  For  the  first  six  months  of  the 
current  year  imports  have  been  only  a  little  more  than  half 
what  they  were  last  summer  and  autumn.  While  exports 
have  held  up  remarkably  well,  as  compared  with  those  of 


IS  EUROPEAN  TRADE  RECOVERING?  33 

Great  Britain,  they  have  nevertheless  fallen;  in  June 
of  this  year  they  were  only  about  two-thirds  of  what  they 
had  been  last  autumn.  Do  these  figures  then  prove  that 
France  is  coming  back  with  giant  strides,  as  has  been  con- 
tended even  by  eminent  financiers  and  statesmen? 

The  collapse  of  imports  might,  conceivably,  indicate  that 
French  purchasing  power  and  French  credit  have  been  pro- 
portionately reduced.  If  this  is  the  case,  French  exports 
will  shortly  show  material  further  declines.  The  substantial 
maintenance  of  French  exports  during  recent  months  might 
at  the  same  time  be  explained  by  the  familiar  "lag" ;  the 
large  volume  of  raw  materials  imported  in  the  autumn 
would  naturally  not  be  ready  for  export  as  finished  goods 
until  some  months  later.  The  detailed  figures  of  French 
imports,  in  fact,  show  that  the  increase  of  total  imports  dur- 
ing the  late  autumn  of  1920,  as  compared  with  August,  was 
due  to  increased  buying  of  raw  materials;  imports  of  food 
and  manufactured  articles  both  declining. 

Other  factors  helping  to  maintain  the  volume  of  French 
exports  to  date  are  the  exportation  of  German  coal, 
furnished  under  the  Spa  agreement,  to  fill  the  gap  caused  by 
the  British  coal  strike,  and  export  back  to  the  United  States 
of  American  war  supplies  "sold  cheap"  on  credit  to  France 
after  the  Armistice.  Neither  of  these,  of  course,  bespeak 
increasing  production  in  France. 

Character  of  French  Imports 

The  only  reasoning  that  could  lead  to  the  conclusion  that 
the  present  trade  figures  of  France  indicate  an  improving 
economic  situation  is  that  the  decline  in  imports  represents 
a  curtailment  of  foreign  purchasing  of  luxuries,  on  the  one 
hand,  and  of  foodstuffs,  on  the  other.  Do  the  detailed  fig- 
ures show  that  this  has  been  the  case  ?  The  data  for  August 
and  December,  1920,  and  for  June,  1921,  follow: 


34  THE  SITUATION  AS  IT  REALLY  IS 

Character  of  French  Imports 
(In  francs,  coo  omitted) 

Raw  Manufactured 

Food  Materials         Materials  Total 

1920,  August    723.749  1,171.091  905.613  3,800453 

1920,  Dec 672,861  1,548,681  726,715  2,948,257 

1921,  June    490,615  871,374  361.54s  1,723,534 

Decline      per      cent 

since  Dec,   1920..  27  45  50  43 

The  largest  percentage  decrease  in  imports  is  in  manu- 
factured articles,  which  include  luxuries.  This  evidences 
curtailed  consumption.  The  next  largest  decrease  is  in  raw 
materials,  indicating  that  purchases  of  basic  essentials  for 
manufacturing  are  falling  rapidly.  The  dearth  of  raw 
materials  is,  however,  not  being  made  good  by  increased 
production,  as  the  falling  exports  witness. 

Importations  of  foodstuffs  were  27  per  cent  less  in  June, 
1 92 1,  than  they  were  in  December,  and  32  per  cent  less  than 
in  June,  1920.  This  indicates  some  genuine  improve- 
ment in  French  agricultural  conditions.  Agriculture  is 
not  directly  affected  by  business  depression,  and  a  decrease 
in  imports  of  foodstuffs,  in  the  main,  indicates  increased 
domestic  production  of  foodstuffs.  In  the  year  1920  agri- 
cultural production  increased  considerably  as  compared  with 
the  year  previous.  Further  improvement  would  no  doubt 
have  been  shown  this  year  had  it  not  been  for  the  unprece- 
dented drought.  As  it  stands,  however,  agricultural  produc- 
tion in  France  will  probably  be  smaller  than  it  was  last  year, 
with  the  result  that  food  imports  for  the  second  half  of 
1 92 1  will  not  be  much  less  than  they  were  a  year  ago.  The 
fact  that  the  Hoover  Relief  Organization  has  had  to  resume 
operations  in  the  devastated  areas  this  summer  is  significant. 

The  conclusion  with  reference  to  French  foreign  trade, 
therefore,  is  that  the  data  which  have  been  so  widely  quoted 


IS  EUROPEAN  TRADE  RECOVERING?  35 

as  proof  of  remarkable  improvement  in  France  prove  noth- 
ing of  the  kind.  There  has  seldom  been  a  more  egregious 
error  in  the  interpretation  of  economic  data  than  that  which 
finds  in  recent  French  trade  figures  evidences  of  remarkable 
improvement  in  French  conditions.  The  collapse  of  French 
imports,  which  alone  accounts  for  the  "favorable"  trade 
balance,  is  apparently  due  in  part  to  the  curtailment  of 
American  export  credits;  but  it  is  in  the  main  a  reflection 
of  the  world-wide  business  depression.  All  that  can  be  said 
is  that  French  exports  have  held  up  surprisingly  well  as 
compared  with  those  of  other  nations. 

Italian  Foreign  Trade 

The  following  data  show  the  present  foreign  trade 
position  of  Italy  :^ 

(In  lire  000,000  omitted) 

Adverse 
Exports        Imports  Balance 

1919,  monthly  average 506  1,385  879 

1920,  "  "        650  1,322  672 

1920 

August   532  1,249  717 

September    570  1,202  632 

October    707  1.126  419 

November    73i  1.240  509 

December    853  1,591  738 

1921 

January    503  1,166  663 

February    566  1,320  754 

March   569  i,503  934 

April  586  1,346  760 

It  should  be  noted  first  that  Italian  exports  this  year  are 
only  a  little  larger  than  in  19 19,  and  that  they  are  now  run- 
ning considerably  less  than  the  average  for  1920.     More- 

'  These  figures  refer  to  1919  value  units. 


36  THE  SITUATION  AS  IT  REALLY  IS 

over,  they  have  fallen  very  materially  since  the  peak  was 
reached  last  autumn.  This  in  spite  of  the  fact  that  the 
process  of  inflation  has  not  been  so  definitely  checked  in 
Italy  as  in  France. 

The  second  point  to  be  observed  is  that  the  Italian  trade 
balance  has  not,  like  that  of  France,  improved  in  recent 
months.  This  is  because  the  imports  have  not  as  yet  shown 
any  tendency  to  decline,  doubtless  because  of  the  persistence 
of  inflation  in  Italy,  the  data  on  which  will  be  presented  in 
Chapter  IV. 

Swedish  Foreign  Trade 

The  following  trade  data  for  Sweden  may  be  taken  as 
typical  of  those  for  the  neutral  countries  of  Europe.  All 
figures  are  computed  on  the  basis  of  19 19  value  units. 

(In  kroner,  000,000  omitted) 

Exports 

1919,  monthly  average 131 

1920,  "  "        191 

1920 

August  230 

September    333 

October    218 

November I77 

December    171 

1921 

January   91 

February   89 

March    75 

April    69* 

*  Provisional  estimate. 

The  balance  has  been  reduced  somewhat,  but  only  be- 
cause the  imports  have  fallen  a  bit  more  than  the  exports. 
The  significant  thing  is  that  Swedish  trade  in  general  is 


Adverse 

tnports 

Balance 

211 

80 

281 

90 

308 

78 

325 

92 

299 

81 

228 

SI 

197 

26 

122 

31 

116 

27 

99 

24 

io6* 

27 

IS  EUROPEAN  TRADE  RECOVERING?  37 

Stagnant.  The  neutral  countries  generally  have  suffered 
quite  as  much  from  the  world-wide  depression  as  have  the 
belligerent  nations. 

Discussion  of  German  foreign  trade  is  reserved  for  the 
chapter  on  Germany's  ability  to  pay.  It  only  remains  to 
state  that  the  trade  of  the  other  former  Central  Powers  has 
suffered  greatly  this  year,  as  has  also  that  of  Russia,  Poland, 
and  the  other  states  created  by  the  peace  settlement. 

The  conclusion  of  the  chapter  is,  clearly  enough,  that 
European  trade  this  year  has,  on  the  whole,  been  very  much 
less  satisfactory  than  it  was  in  1920.  According  to  the 
foreign  trade  index,  Europe  is  not  as  yet  coming  back;  on 
the  contrary,  the  real  economic  aftermath  of  the  war  is  now 
making  itself  felt. 


CHAPTER   IV 

NATIONAL  DEBTS 

Past  Fiscal  Policies 

Like  Dickens'  genial  Micawber,  who  optimistically  pre- 
sented his  LO.U.'s  in  fancied  "settlement"  of  his  steadily 
mounting  obligations,  a  very  considerable  percentage  of  the 
human  race  is  strangely  oblivious  of  the  inevitable  conse- 
quences of  unrestricted  debt  accumulation.  No  matter  how 
great  or  how  pressing  the  obligations,  there  is  always  an 
abiding  faith  that  something  is  sure  to  "turn  up"  which  will 
afford  a  breathing  spell  and  provide  an  opportunity  for 
making  the  necessary  preparation  for  an  adjustment  of  one's 
financial  relations.  And  in  the  case  of  government  debts 
there  is  far  greater  indifference  to  consequences  than  with 
private  obligations.  It  is  hardly  too  much  to  say  that  the 
great  majority  of  people  assume,  instinctively  as  it  were, 
that  a  rapid  growth  of  government  debts  is  a  matter  of  little 
moment.  When  obligations  fall  due,  renew  them;  then  go 
right  on  accumulating  more. 

One  of  the  hardest  lessons  society  has  ever  had  to  learn 
is  that  government  revenues  must  be  made  to  equal  govern- 
ment expenditures  if  ultimate  financial  disaster  is  to  be 
avoided.  The  lesson,  however,  appears  to  have  been  fairly 
well  learned,  except  in  Mexico  and  numerous  countries  of 
Central  and  South  America,  by  the  end  of  the  nineteenth 
century.  All  of  the  leading  national  governments  of  the 
world,  and  most  state  and  municipal  governments,  raised 
revenues  sufficient  to  meet  expenditures.  While  accumulated 
debts  were  seldom  reduced,  they  were  nevertheless  under 
control ;  they  were  not  allowed  to  increase  regardless  of  the 

38 


NATIONAL  DEBTS  39 

adequacy  of  revenues  for  the  payment  of  interest  thereon. 
Financiers  and  economists  were  reasonably  content  with  this 
feature  of  government  fiscal  management. 

When  Alexander  Hamilton  assumed  control  of  the 
finances  of  the  Republic  in  1789,  he  found  it  necessary  to 
reckon  with  the  fact  that  one  of  the  chief  causes  of  the 
American  Revolution  had  been  the  insistence  of  colonial 
governments  on  their  inalienable  rights  to  issue  bills  of 
credit  and  acquire  debts  without  consent  of  the  mother 
country.  He  also  found  that  the  strongest  opposition  to 
the  adoption  of  our  federal  Constitution  came  from  those 
colonies  which  had  experimented  most  with  the  government 
printing  presses.  They  strongly  opposed  giving  to  the 
federal  government  the  power  to  coin  money  and  regulate 
the  value  thereof.  And  many  years  later,  in  the  fourteen 
years  following  the  Civil  War,  a  struggle  took  place  to 
determine  whether  the  United  States  government  should  be 
allowed  to  issue  United  States  notes  or  greenbacks  as  a 
means  of  getting  something  for  nothing.  However,  in  the 
years  immediately  preceding  the  Great  War,  unsound  gov- 
ernment financial  methods  had  given  way  before  the  accumu- 
lated wisdom  derived  from  the  disastrous  experiences  of 
the  past. 

Lessons  Unlearned 

The  war  has,  however,  turned  backward  the  clock  of 
time.  Society  appears  to  have  unlearned  the  lessons  it  was 
believed  to  have  mastered.  With  barely  an  exception, 
European  governments  have  made  no  real  effort  since  the 
war  to  adjust  expenditures  to  income;  and  there  has  been  an 
amazing  popular  indifference  to  this  appalling  fact.  It  is, 
moreover,  not  merely  national  governments  that  have  fallen 
into  evil  ways;  European  states  and  municipalities  without 
number  have  followed  a  similar  course.    And  Europe  is  not 


40  THE  SITUATION  AS  IT  REALLY  IS 

alone  in  pursuit  of  this  folly,  as  anyone  may  see  who  will 
take  the  trouble  to  scrutinize  the  financial  status  of  New 
York  and  Chicago,  the  two  largest  cities  in  the  United 
States. 

It  is  not  merely  because  it  is  extremely  difficult  to  balance 
budgets  that  governments  fail  to  do  so.  It  is  almost  as 
much  because  the  lessons  of  sound  finance  have  been  for- 
gotten. Interestingly  enough,  it  is  not  the  uneducated 
classes  alone  who  are  responsible  for  the  present  disregard 
of  correct  principles  of  government  finance.  An  amazing 
number  of  prominent  government  officials  and  men  of  affairs 
were  swept  off  their  feet  by  the  events  of  the  war.  At  the 
time  of  the  Armistice  there  was  no  end  of  prediction  in 
Washington  and  London  and  Paris  that  there  was  no  pos- 
sibility of  a  post-war  era  of  depression  and  hard  times, 
because  society  had  learned  how  to  make  effective  use  of 
that  marvelous  economic  phenomenon  known  as  credit.  The 
staggering  volume  of  credit  operations  during  the  war  had, 
in  fact,  quite  turned  the  heads  of  many,  if  not  most, 
statesmen. 

Society  had  not  learned  to  use  credit  effectively;  it  had 
rather  re-learned  how  to  abuse  it.  The  three  years  that 
have  elapsed  since  the  Armistice  have  in  public,  as  well  as  in 
private,  finance  been  marked  by  a  credit  debauch  that  is 
hardly  paralleled  in  history.  The  appalling  consequences 
of  the  policies  that  have  been  pursued  are  now  revealed 
in  the  disillusioning  figures  of  government  debts  and 
government  budgets. 

British  National  Debt 

The  following  table,^  shows  the  debt  of  Great  Britian 
before  the  war  and  since  the  close  of  hostilities  (in  pounds 
sterling)  : 

•  The  Economist,  March  28,  1921. 


NATIONAL  DEBTS  4I 

Total  Debt 
1914,  Aug £  700,000,000 

1918,  Nov 7,120,000,000 

1919,  Mar 7,481,000,000 

1919,  Dtx 8,079,000,000 

1920,  Mar 7,876,000,000 

1921,  Mar 7,630,000,000 

It  will  be  seen  that  during  the  war  the  British  debt  was 
multiplied  tenfold.  After  the  war  the  debt  rose,  in  1919, 
£600,000,000;  but  in  1920  and  1921  it  declined  slightly.  It 
is  clear  that  the  expenses  of  government  were  then  being 
met  by  taxation.  ^ 

The  question  presents  itself,  however,  whether  the  heavy 
burden  of  taxation  which  the  British  public  is  enduring  is 
not  seriously  impeding  the  economic  life  of  the  nation.  This 
issue  will  be  subsequently  considered  in  an  analysis  of  the 
uses  to  which  the  national  income  of  Great  Britain  is  now 
being  devoted.  It  will  there  be  shown  that  the  burden  of 
debt,  together  with  other  government  expenses  and  unem- 
ployment insurance,  are  not  only  absorbing  all  the  funds 
ordinarily  available  for  new  capital  development,  but  are 
actually  preventing  the  maintenance  of  the  existing  industries 
of  the  nation. 

Some  measure  of  alleviation  from  taxation  in  Great 
Britain  might  come  if  the  Allied  nations  paid  the 
£1,800,000,000  they  owe  Great  Britain;  but  the  chance 
that  any  of  the  Allied  nations  will  be  able  to  pay  these 
debts  is  indefinitely  remote.  Indeed,  the  tentative  proposal 
of  Great  Britain  looking  towards  a  cancellation  of  all  inter- 
Allied  debts  arising  from  the  war,  affords  evidence  that  she 
is  not  counting  upon  any  positive  fiscal  relief  from  this 
source.^ 


'  For  the  estimates  for  1922,  see  page  47. 

'That  Great  Britain  would  have  nothing  to  gain  from  an  all-around 
cancellation  of  debts,  may  be  seen  from  the  fact  that  while  the  British 


42  THE  SITUATION  AS  IT  REALLY  IS 

Indebtedness  of  French  Nation 

Let  us  now  turn  to  the  figures  of  French  national  in- 
debtedness. The  following  table  ^  shows  the  effects  of  the 
war  (in  francs,  the  foreign  debts  being  estimated  at  current 
rates  of  exchange)  : 

(In  francs) 

Total  Debt 
1914,  July   31 34,188,000,000 

1918,  Dec.  31 151,122,000,000 

1919,  Dec.  31 240,242,000,000 

1920,  Sept.  31 285,836,000,000 

1921,  Feb.   28 302,743,000,000 

The  French  debt  before  the  war  was  the  largest  of  any 
of  the  national  debts,  per  capita.  In  terms  of  percentage 
of  national  income,  it  also  constituted  one  of  the  largest 
debts  in  the  world.*^  This  huge  debt  was  multiplied  during 
the  war  five  times ;  and  it  has  been  exactly  doubled  since  the 
Armistice.  In  the  single  year,  1919,  the  debt  increased  89 
billion  francs.  This  increase  must,  in  justice,  be  charged  in 
no  small  degree  to  war  expenditures  incident  to  demobiliza- 
tion and  the  liquidation  of  war  contracts. 

But  in  the  fourteen  months  following  191 9,  the  debt 
rose  from  240  billion  francs  to  302  billion  francs,  an  increase 
of  62  billion  francs,  or  almost  twice  the  total  of  the  enor- 
mous debt  of  1914.  Some  of  this  amount  is  supposed  to  be 
recoverable  from  Germany  through  reparation  payments. 
The  budget  for  1920  allowed  for  20  billions  "recoverable" 


war  debt  to  the  United  States  amounts  to  £1,141,000,000,  the  debts  of 
other  Allied  nations  to  Great  Britain  amounts  to  £1,731,000,000,  which 
sum  is  exclusive  of  colonial  obligations,  amounting  to  £119,500,000. 
(League  of  Nations,  International  Financial  Conference,  Brussels,  1920, 
Paper  IV,  Public  Finance,  page  21.) 

*  La  France  Financiere  et  Economique,  Tome  I,  page  305 ;  Projet 
de  loi  du  Budget,  1920,  pages  162-3;  Ibid.,  1921,  pages  12,  13,  184,  185. 

^  Italy  and  Japan  were  the  only  other  nations  with  as  high  a  ratio  of 
debt  to  income. 


NATIONAL  DEBTS  43 

from  Germany,  and  the  1921  budget  for  16  billions.  Thus 
for  the  fourteen  months  from  January  i,  1920,  to  March  i, 
1 92 1,  the  total  of  such  recoverable  sums  was  about  23 
billion  francs.  This  leaves  39  billion  francs  (62  billion — 
23  billion  francs)  as  the  net  increase  in  the  French  debt  for 
the  fourteen  months  ending  March  i,  1920,  for  which  the 
French  people  must  stand  responsible.® 

Whether  France  is  likely,  in  fact,  to  recover  the  other 
23  billions  from  Germany  must  be  left  for  later  considera- 
tion."^ It  will  suffice  here  to  say  that  payments  by  Germany 
in  the  immediate  future  are  not  likely  to  result  in  any  reduc- 
tion of  the  French  debt.  The  agreement  entered  into  at 
Spa,  whereby  Great  Britain  was  permitted  to  value  sur- 
rendered German  ships  at  the  price  at  which  the  British 
government  should  eventually  sell  them,  and  the  decision  of 
the  Reparations  Commission  to  charge  France  at  once  with 
the  total  value  of  the  coal  mines  of  the  Saar,  together  result 
in  giving  practically  all  the  actual  money  accumulated  in  the 
Treasury  of  the  Reparations  Commission  since  May  i,  1921, 
to  Allied  nations  other  than  France. 

Foreign  Debt 

Much  has  been  made  by  some  people — even  by  American 
financiers — of  the  decrease  in  the  French  foreign  debt  during 
the  last  year  or  so.  The  decrease  is  approximately  from 
35  billion  to  33  billion  francs.  This  reduction,  however,  was 
not  accomplished  as  a  result  of  genuine  saving  in  France. 
The  French  budget  did  not  afford  a  surplus  to  be  used  for 


"The  figures  for  French  foreign  indebtedness  are  usually  computed 
in  terms  of  current  exchange  rates,  and,  since  French  exchange  fell 
during  the  period  in  question,  not  all  of  the  increase  is  attributable 
to  the  excess  of  government  expenditures  over  receipts.  Perhaps  10 
per  cent  of  it  is  due  to  the  fall  in  exchange  rates,  which  affects  the 
value  of  the  foreign  indebtedness. 

'  See  Part  II. 


44  THE  SITUATION  AS  IT  REALLY  IS 

this  purpose ;  nor  did  French  foreign  trade  yield  a  favorable 
balance  available  to  pay  off  foreign  debts.  It  was  merely 
accomplished  by  a  shifting  of  obligations,  by  proportionately 
increasing  the  domestic  debt. 

Now  it  may  possibly  be  good  policy  thus  to  reduce  the 
French  foreign  debt  at  the  expense  of  the  domestic  debt,  but 
let  no  one  be  deceived  thereby  and  led  to  believe  that  such  a 
reduction  in  the  foreign  debt  is  evidence  of  fundamental 
improvement  in  French  conditions. 

As  to  the  immediate  future,  it  will  be  shown  in  a  study 
of  the  French  budget  that  there  is  certain  to  be  a  further 
large  increase  in  the  French  debt  during  the  current  year. 

These  persistent  increases  of  French  national  debt  are 
obviously  due  to  the  reluctance,  or  inability,  of  the  French 
government  to  raise  sufBcient  revenue  to  meet  expenses.  The 
French  people,  unlike  the  British,  are  not  yet  shouldering  the 
burden  of  war  and  post-war  costs.  They  are  still  attempt- 
ing to  postpone  the  evil  day. 

National  Debt  of  Italy 

The  following  table  shows  the  Italian  national  debt 
before  and  since  the  war  :* 

(In  lire) 

Total  Debt 
1913,  Dec •      15,000,000,000 

1919,  Dec 84,000,000,000* 

1920,  June   95,000,000,000 

1920,  Dec 100,000,000,000 


*  League  of  Nations  International  Financial  Conference,  Brussels,  1920. 

It  appears  from  these  figures  that  Italy's  national  debt 
increased  during  the  war  more  than  five  times.    Moreover, 


'From  the  Federal  Reserve  Bulletin,  May,  1921. 


NATIONAL  DEBTS  45 

since  the  war  the  debt  has  increased  further  in  an  alarming 
fashion.  Thus  the  ItaUan  situation  is  the  replica  of  that  in 
France.  Italy  has  obviously  not  as  yet  demonstrated  her 
financial  solvency. 

National  Debt  of  Germany 

Germany's  national  debt  is  as  follows  :^ 

(In  marks) 

Total  Debt 
1914,  July      1 5,300,000,000 

1918,  Dec.    31 140,000,000,000 

1919,  Dec.    31 197,000,000,000 

1920,  Oct.  27 :  " 

Funded  and  floating  debt  including 
interest  on  railroads  taken  over 
from  federal  states,  etc 287,000,000,000 

Compensation  to  German  citizens 
arising  out  of  the  Peace  Treaty...     131,000,000,000    418,000,000,000 


The  German  government  financial  statements  are  so 
complicated  and  so  obscure  that  it  is  impossible  to  find  out 
the  precise  status  at  any  given  time.  Taking  the  above 
figures,  however,  as  approximately  exact,  what  conclusion 
may  be  drawn?  With  government  debts  expanding  by 
billions  of  marks  monthly,  it  cannot  be  said  that  Germany 
has  as  yet  demonstrated  her  capacity,  or  willingness,  to  live 
within  her  means.  In  view  of  the  greater  rapidity  with 
which  the  German  debt  is  increasing,  Germany  may  be 
said  to  be  one  step  further  down  the  scale  of  financial 
instability  than  are  France  and  Italy. 


'League  of  Nations,  Brussels  International  Financial  Conference, 
1920,  Paper  IV,  Public  Finance,  page  21. 

"From  General  Report  on  the  Industrial  and  Economic  Situation 
in  Germany,  Department  of  Overseas  Trade,  London,  1920,  page  57, 


46  THE  SITUATION  AS  IT  REALLY  IS 

Other  European  Countries 

Little  would  be  gained  by  a  study  of  the  debts  of  other 
European  countries.  It  may  merely  be  stated  that  the  neutral 
countries  are  infected  with  the  same  virus.  This  has  been 
particularly  the  case  since  the  war.  The  total  debt  burden 
in  most  cases  is,  however,  not  as  yet  of  staggering 
dimensions. 

As  for  the  other  countries  of  central  and  eastern  Europe, 
figures  of  indebtedness  which  they  furnished  are  so  pre- 
posterously inadequate  that  it  is  useless  to  attempt  a  precise 
statement  of  the  indebtedness  of  each.  One  may  suspect 
that  the  governments  of  these  countries  do  not  even  know 
the  exact  volume  of  their  present  debts.  But  it  is  known 
that  in  many  of  them  the  debt  figures  have  now  reached 
totals,  as  expressed  in  terms  of  their  depreciated  currencies, 
that  are  almost  meaningless.  There  can  be  no  doubt  that 
they  are  much  further  down  the  scale  than  France  or  Italy 
or  even  Germany. 

The  conclusions  to  be  drawn  from  the  data  given  above 
are  plain.  Until  the  various  European  nations  stop  increas- 
ing their  debts,  they  will  not  have  evidenced  their  financial 
solvency.  Until  they  demonstrate  that  they  are  able  to  raise 
each  year  sufficient  revenue  to  meet  running  expenses,  one 
cannot  logically  contend  that  European  countries  are  con- 
valescent and  on  the  highroad  to  financial  recovery. 


CHAPTER  V 

NATIONAL  BUDGETS 

British  Budget 

Throughout  the  discussion  of  national  debts  we  were 
face  to  face  with  the  question  of  national  expenditures  and 
national  revenues.  Before  the  full  significance  of  the 
present  European  fiscal  situation  can  be  appreciated,  we 
must  give  careful  consideration  to  the  question  of  govern- 
ment budgets.  Mounting  public  debts  result  from  unbal- 
anced government  budgets — from  government  deficits.  If 
we  are  to  discern  the  future  we  must  therefore  ascertain  the 
extent  of  the  present  fiscal  deficits  in  the  various  European 
countries,  and  appreciate  the  extreme  gravity  of  the  taxation 
problem  with  which  each  is  confronted.  This  will  consti- 
tute the  subject  for  discussion  in  this  chapter. 

How  difficult,  even  impossible,  is  the  task  of  balancing 
budgets  in  most  European  countries — unless  correct  princi- 
ples are  substituted  for  the  aimless  policies  that  now  control 
the  administration  of  national  finances — can  only  be  appre- 
ciated by  a  look  at  the  precise  figures  of  the  various 
European  budgets  at  the  present  time. 

Attention  will  first  be  directed  to  the  British  budget,  by 
far  the  most  cheerful  one  to  be  considered.  The  figures 
for  the  years  since  the  war  are  as  follows : 

Revenue  Expenditures  Deficit 

1919-1920    ^1,339,571,381  £1,665,772,928  £326,201,547 

1920-1921    1,425,985,000  1,195,428,000  230,557,000** 

1921-1922*    1,058,150,000  974,023,000  84,127,000** 


*  Estimated. 
**  Surplus. 


47 


48  THE  SITUATION  AS  IT  REALLY  IS 

Real  Situation 

It  would  appear  from  these  figures  that  Great  Britain 
succeeded  in  1 920-1 921  in  balancing  her  budget,  and  that 
a  surplus  of  £230,552,000  was  available  for  debt  reduction. 
The  estimates  for  1 921- 1922  indicate  a  further  surplus  of 
£84,127,000.  It  would  seem,  therefore,  that  Great  Britain 
was  in  a  satisfactory  financial  position,  making  slow  but 
certain  progress  toward  a  reduction  of  the  national 
indebtedness. 

The  British  financial  situation  is  not,  however,  so  favor- 
able as  the  above  figures  indicate.  In  the  first  place,  the 
surplus  of  1 920- 1 92 1  is  more  nominal  than  real.  In  all 
other  European  countries,  as  will  be  seen,  sufficient  taxes 
have  not  been  levied  to  balance  the  budget,  and  as  a  conse- 
quence the  governments  have  had  to  borrow  the  amount  of 
the  deficits.  In  Great  Britain  heavy  enough  taxes  have  been 
levied  to  balance  the  budget;  but  it  appears  that  many 
persons  have  borrowed  funds  from  the  banks  in  order  to 
pay  their  taxes.  The  following  quotation  from  the  Right 
Hon.  R.  McKenna,  formerly  Chancellor  of  the  Exchequer 
and  now  head  of  the  great  London  Joint  City  and  Midland 
Bank,  Ltd.,  indicates  what  has  occurred  in  Great  Britain : 

"Our  (taxation)  experience  during  the  last  year  has 
taught  us  that  there  is  a  limit  beyond  which  trade  and  in- 
dustry cannot  be  burdened  without  grave  danger  to  their 
strength  and  permanence.  That  limit  is  passed  when  traders 
are  forced  to  borrow  from  their  banks  in  order  to  meet 
their  liabilities  to  the  tax  collector ;  and  it  is  a  fact  that  no 
inconsiderable  part  of  the  expansion  of  credit  during  the 
year  which  has  just  elapsed  was  due  to  this  cause."  ^ 

The  British  method  of  having  the  taxpayers  do  the  bor- 
rowing rather  than  the  government,  is  doubtless  superior  to 


*  London  Joint   City  and   Midland   Bank,   Ltd.,  Monthly   Review, 
January,  192 1,  page  5. 


NATIONAL  BUDGETS  49 

the  continental  method  of  government  borrowing  to  make 
ends  meet;  for  there  is  less  danger  of  abuse  of  government 
power — less  incentive  to  extravagance.  But  no  one  should 
be  misled  into  the  conclusion  that  Great  Britain's  finances 
are  in  an  altogether  satisfactory  condition. 

The  estimated  figures  for  1921  also  require  some  con- 
sideration. It  appears  that  certain  additional  liabilities  not 
included  in  the  official  budget  will  convert  the  £84,000,000 
of  estimated  surplus  into  a  deficit  of  £82,000,000.^  The 
severe  business  depression  will  also  affect  the  budget  in  a 
twofold  manner :  ( i )  by  increasing  expenditures,  mainly  for 
unemployment  insurance;  and  (2)  by  greatly  reducing  the 
receipts  from  taxation.  Unless  the  British  people  borrow 
tax  money  much  more  extensively  from  the  banks  than  they 
did  last  year,  there  is  little  doubt  that  this  year  will  show  a 
substantial  deficit.  One  need  not  be  surprised  if  it  should 
amount  to  well  over  £100,000,000. 

French  Budgetary  Situation 

It  is  a  matter  of  common  knowledge  that  France  has  not 
been  able  since  the  war  to  make  financial  ends  meet.  That 
is  to  say,  expenditures  have  continually  been  greatly  in  excess 
of  revenues,  the  differences  being  secured  through  further 
borrowing — in  part  from  the  general  public  through  the  sale 
of  bonds  and  in  part  from  the  Bank  of  France.  The 
following  figures  reveal  the  general  situation : 

(In  francs) 

Receipts*  Expenditures  Deficit 

1919   11,480,000,000  49,132,000,000  37,652,000,000 

1920  19,735,022,000  45,987,358,000  26,252,336,000 

1921**   23,262,969,977  46,321,413,889  23,558,443,912 

*  From  taxes  and  miscellaneous  sources,  not  including  loans. 
**  Estimated. 

'Ibid.,  April  30,  page  2. 

4 


50  THE  SITUATION  AS  IT  REALLY  IS 

The  figures  given  in  this  table  are  not  guaranteed  to  be 
accurate.  There  has  been  so  much  manipulation  of  figures 
and  so  much  loose  accounting  in  the  presentation  of  French 
budgetary  information  that  it  is  impossible  for  any  outsider 
to  ascertain  the  exact  situation.  No  one  who  has  not 
examined  the  detailed  figures  can  have  any  conception  of 
the  extraordinary  nature  of  the  accounting  legerdemain 
that  is  found  in  the  Budget  General.  The  French  budget 
has  always  been  very  difficult  of  precise  interpretation;  since 
the  war  it  has  been  impossible.  Only  one  conclusion  may 
with  safety  be  drawn  from  the  figures  as  presented,  namely, 
that  they  do  not  exaggerate  the  amount  of  the  deficits. 
Moreover,  the  original  estimates  are  usually  greatly  exceeded 
in  the  final  reckoning,  as  the  amount  of  the  increase  of  the 
French  debt  indicates. 

Extraordinary  Budget 

In  order  to  gain  a  clear  understanding  of  the  French 
financial  situation  at  present,  it  will  be  necessary  to  consider 
the  figures  of  the  French  budget  for  1921  in  some  detail. 
There  are  divers  and  sundry  parts  of  the  French  budget, 
named  in  such  a  way  as  easily  to  lead  to  quite  erroneous 
conclusions.  For  the  1921  expenditures  they  were  as 
follows  :^ 

(In  francs) 

Ordinary  budget   23^94,376,787 

Extraordinary  budget   3»253,209,39i 

Special   "recoverable"  budget 15,317,184,790 

Special  budget  595,527,763 

(     639,753,400 
Budgets  annexes ■<  2,621,361,758 

(     600,000,000 

Total   46,321413,889 

*  Data  taken  from  Budget  General  de  1'  Exercice,  1921 ;  and  Journal 
Official  de  la  Republique  Frangaise,  Lois  et  Decrets,  1921. 


NATIONAL  BUDGETS  51 

These  numerous  budgets  require  explanation.  It  is 
often  insisted  that  France  really  balances  her  budget  since 
the  revenue  is  equal  to  the  ordinary  budget;  it  is  only  the 
extraordinary  and  other  budgets  on  which  France  is  in 
arrears.  But  the  fact  is  that  the  true  definition  of  the  ordi- 
nary expenditure  is  such  expenditure  as  it  is  believed  can  be 
balanced  with  revenues.  Whatever  the  estimated  revenues 
are  in  any  year,  that  is  (approximately)  the  ordinary  expen- 
diture. If  one's  income  is  $10,000  per  year  and  his 
expenditures  are  $12,000,  let  him  comfort  himself  by  saying 
that  his  ordinary  expenditures  are  only  $10,000 — that  the 
additional  $2,000  is  extraordinary. 

There  might  be  some  point  to  this  method  of  budgetary 
accounting  if  the  so-called  extraordinary  expenditures  were 
in  any  sense  special  or  temporary.  The  truth  is  they  are 
not  temporary;  they  are  distributed  among  all  the  regular 
departments  of  government  and  there  is  not  the  slightest 
evidence  that  most  of  them  are  not  of  steadily  recurring 
kind.  Indeed,  the  evidence  that  this  extraordinary  budget 
is  a  mere  subterfuge  is  found  in  the  fact  already  mentioned 
— that  the  ordinary  budget  is  always  made  to  coincide  with 
the  volume  of  estimated  revenues. 

It  must,  therefore,  be  concluded  that  for  the  current  year 
the  French  budget — exclusive  of  the  special  and  annex 
budgets,  which  will  be  considered  presently — fails  to  balance 
by  at  least  the  amount  of  the  extraordinary  expenditures, 
namely,  3,253,209,391  francs.  We  say  by  at  least  this 
amount,  since  it  is  possible  that  the  revenues  will  fall  short 
of  the  estimates  and  that  the  expenditures  will  exceed  the 
estimates.  The  present  estimates  of  revenue  were  made 
before  it  was  clear  how  serious  would  be  the  effects  of  the 
business  depression  and  the  declining  price  level  upon  mone- 
tary profits  and  incomes.  As  a  matter  of  fact  it  is  already 
acknowledged  in  France  that  the  revenues  will  fall  much 


52  THE  SITUATION  AS  IT  REALLY  IS 

below  the  original  estimates.  The  sales  tax  has  been  most 
disappointing,  yielding  less  than  50  per  cent  of  the  estimates ; 
and  there  is  the  greatest  difficulty  in  collecting  other  taxes. 
Last  year's  tax  revenues  amounted  to  17,387,390,100  francs; 
and  there  is  certainly  no  present  reason  for  believing  that 
this  year's  totals  will  exceed  this  amount.  If  this  proves 
to  be  the  case,  the  deficit  for  the  ordinary  and  extraordinary 
accounts  will  total  about  9  billion  francs. 

Other  Budgets 

Still  postponing  consideration  of  the  special  "recover- 
able" budget,  we  find  three  budget  annexes,  amounting 
to  a  total  of  3,861,115,158  francs.  The  first  of  these, 
639,753,400  francs,  represents  advances  of  the  Treasury 
for  the  operation  of  the  state  railways.  The  second, 
2,621,361,758  francs,  is  for  administrative  expenses  in  con- 
nection with  the  manufacture  of  moneys  and  medals,  gov- 
ernment printing,  the  legion  of  honor,  etc.  The  third, 
600,000,000  francs,  is  for  material  ceded  to  foreign 
countries.  This  presumably  includes  munitions  and  supplies 
to  be  furnished  to  Poland.  These  annex  budgets  increase 
the  total  deficit  to  more  than  12,500,000,000  francs. 

Of  much  greater  importance  are  the  "special"  budgets. 
The  second  of  the  two,  for  595,527,763  francs,  is  for  the 
"maintenance  of  troops  of  occupation  in  foreign  countries." 
The  first,  for  15,317,184,790  francs,  is  supposed  to  be  re- 
coverable from  Germany  under  the  terms  of  the  Peace 
Treaty.  It  includes  appropriations  for  war  pensions  and  for 
the  reconstruction  of  the  devastated  areas,  including  admini- 
strative expenses  incident  thereto.  If  these  deficits  be  added 
to  the  others  already  discussed,  the  total  for  this  year  be- 
comes more  than  28  billion  francs. 

Since  the  Armistice,  deficits  in  connection  with  recon- 
struction activities  have  been  rapidly  accumulating.     Funds 


NATIONAL  BUDGETS  53 

for  reconstruction,  as  well  as  for  the  payment  of  pensions, 
etc.,  are  advanced  by  the  French  government  on  the  theory 
that  reparation  receipts  will  eventually  suffice  to  wipe  out 
these  accounts;  hence  the  terms  "special"  and  "recoverable." 
It  will  later  be  shown,  however,  that  very  little  of  the  money 
expended  by  France  for  the  reconstruction  purposes  or  for 
pensions  will  ever  be  recovered.* 

But  if  one  prefers  to  give  France  the  benefit  of  an  un- 
reasonable doubt  and  to  assume  for  the  moment  that  the 
"recoverable"  budget  will  ultimately  be  recovered,  the  French 
deficit  for  the  year  still  stands  at  about  13  billion  francs. 

Additional  Obligations 

Indeed,  it  appears  certain  that  even  this  stupendous 
figure  will  not  tell  the  whole  tale.  According  to  an  eminent 
American  financier,  who  has  devoted  several  months  to  a 
study  of  the  French  economic  and  financial  situation,  the 
Senate  Commission  of  France  estimates  that  in  addition  to 
the  ordinary  and  extraordinary  and  recoverable  budgets 
"the  Treasury  must  find  18  billions  more  to  provide  for 
supplementary  credits,  stipulated  repayments  of  external 
debt,  arrears  of  payment  on  previous  budgets,  deficits  on 
special  services,  reduction  of  advances  from  the  Bank  of 
France,  and  a  billion  francs  of  advances  on  the  railways." 

Some  of  these  items  apparently  duplicate  those  in  the 
budget  annexes  already  mentioned,  and  some  of  them  repre- 
sent new  obligations  created  for  the  reduction  of  old  ones. 
But  they  are  not  all  duplicate  items;  and  if  we  may  judge 
from  the  experience  of  the  last  two  years,  they  will  consti- 
tute very  heavy  additions  to  the  deficit  for  the  year.  The 
financier  in  question  estimates  the  total  French  deficit  for  the 
year  1921  at  35  billion  francs,  less  whatever  may  be  re- 
covered from  Germany,    These  figures  are,  moreover,  based 

*  See  Part  II  on  reparations. 


54  THE  SITUATION  AS  IT  REALLY  IS 

on  the  assumption  that  the  estimated  revenues  for  the  year 
are  not  exaggerated. 

It  is,  however,  impossible  to  arrive  at  any  very  precise 
estimate  of  the  probable  extent  of  the  French  deficit  this  year. 
Twenty  billion  francs,  exclusive  of  the  15  billions  "recover- 
able," does  not,  however,  appear  to  be  an  excessive  figure. 
This  would  add  20  billion  francs  to  the  French  debt  in  the 
third  year  after  the  war;  and  if  Germany  does  not  pay,  it 
would  add  35  billion  francs. 

It  should  be  remembered  also  that  the  French  budget 
figures  do  not  include  interest  charges  on  the  huge  foreign 
debt  of  France,  incurred  during  the  war.  Payment  of 
interest  on  inter-Allied  debts  has  been  indefinitely  postponed. 

Belgian  Finances 

The  condition  of  the  Belgian  budget  is  very  similar  to 
that  of  France.  In  the  year  1920  the  total  expenditures  were 
8,578,454,000  francs  and  the  revenues  3,020,702,000  francs, 
leaving  a  deficit  of  5,557,752,000  francs.^  The  estimates 
for  1 92 1  call  for  expenditure  of  9,689,742,307  francs  and 
revenue  of  5,108,053,222  francs,  giving  a  deficit  of 
4,581,689,085  francs.    The  detailed  figures  are:*^ 

(In  francs) 
I.  Ordinary :  Deficit 

Expenditures    3,802,840,692 

Revenue   3,1 19,227,222  683,613,470 

3.  Extraordinary: 

Expenditures  3.127,695,765 

Revenue   1,692,074,000  1,435,621,765 

3.  Under  Treaties  of  Peace: 

Expenditure  recoverable  2,759,565,850 

Reparations   paid    296,752,000  2,462,813,850 

Total    4,582,049,085 

*  League  of  Nations  International  Financial  Conference,  Brussels, 
1920,  Vol.  Ill,  page  XI. 

•For  the  year  1921  the  figures  are  estimates.  Data  taken  from 
The  Economic  Review,  April  8,  1921,  page  395. 


NATIONAL  BUDGETS  55 

Here  is  the  same  major  classification  of  expenditures  as 
in  France,  the  same  effort  to  make  things  appear  better  than 
they  are.  It  will  be  noted,  however,  that  in  this  case  even 
the  ordinary  budget  does  not  balance. 

The  German  Budget 

In  view  of  the  widespread  expectation  that  the  budgets 
of  Allied  nations  are  to  find  relief  from  the  receipt  of  German 
reparations,  much  importance  attaches  to  what  has  tran- 
spired in  Germany  since  the  Armistice  in  the  matter  of 
government  finances.  Attention  may,  therefore,  be  called 
to  the  following  figures  : 

(In  paper  marks) 

Expenditures  Receipts  Deficit 

1930 '  Si,892,363,cx)0  27,770,000,000  24,122,363,000 

1921 '  1 10,200,000,000  40,000,000,000  71,200,000,000 

Discouraging  as  these  figures  are,  they  do  not  tell  the 
worst  of  the  story.  They  are  but  preliminary  estimates  of 
expenditures  and  revenues;  and  in  consequence  of  the  dis- 
ordered economic  life  of  Germany,  the  estimates  have  to  be 
radically  changed  almost  from  month  to  month.  The  final 
figures,  therefore,  always  greatly  exceed  the  estimates,  as 
the  statistics  of  mounting  indebtedness  clearly  show.  For 
example,  between  September  20,  1920,  and  October  27,  1920, 
the  "floating"  debt  increased  by  5  billion  marks,  an  increase 
at  the  rate  of  more  than  50  billion  marks  per  annum. ^  This 
compares  with  the  estimated  deficit  for  the  entire  year  of 
only  24  billion  marks.    From  April  i,  1920,  to  April  i,  1921, 


'  League  of  Nations  International  Financial  Conference,  Brussels, 
1920,  Paper  III,  page  XI. 

*  General  Report  on  the  Industrial  and  Financial  Situation  in  Ger- 
many in  December,  1920,  Department  of  Overseas  Trade  of  Great 
Britain,  1921,  page  58. 

•  Ibid.,  page  57. 


56 


THE  SITUATION  AS  IT  REALLY  IS 


the  floating  debt  appears  to  have  actually  increased  by  the 
staggering  sum  of  74  billion  marks. ^" 

Moreover,  these  budgetary  figures  do  not  include  all  the 
items  of  government  expenditure.  For  example,  they  do 
not  include  131  billion  marks  expended  for  compensation  to 
German  citizens  arising  out  of  the  Peace  Treaty,  i.e.,  for  the 
ships  of  the  mercantile  marine,  the  liquidation  of  German 
property  abroad,  the  delivery  of  war  material,  etc.^^  Nor  do 
they  include  reparation  payments  that  Germany  has  agreed 
to  make,  which,  on  the  basis  of  exchange  rates  in  June,  1921, 
would  add  60  or  70  billion  paper  marks  to  the  annual 
budgetary  requirements  of  Germany. 

Other  Countries 

Other  European  budgets  in  1920  were  as  follows  :^^ 


(000  omitted) 


Expenditures  Receipts  Deficit 

Italy 28,450,000  (lire)  9,520,000  18,930,000 

Austria 33,194,000  (kronen)  20,655,000  12,539,000 

Hungary 20,210,748  (kronen)  10,539,947  9,670,801 

Greece 1,874,003  (drachma)  636,325  1,237,678 

Portugal 235,525  (milreis)  110,414  125,111 

Bulgaria 2,994,903  (liva)  1,803,000  1,191,903 

Czechoslovakia 10,416,771  (kronen)  7,750,771  2,666,000 

Finland 1,163,968  (marks)  778,717  385,251 

Poland 15,189,679  (marks)  3,127,625  12,062,054 

Holland 724,192  (guilders)  615,183  109,009 

Norway 584,085  (kroner)  529-937  54.148 

Sweden 890,888  (kronor)  852,027  38,861 

Spain 2,403,730  (pesetas)  1,842,721  561,009 

Switzerland 604,066  (francs)  385,400  218,666 


Ratio  of 
Receipts  to 
Expenditures 

33% 

63 

52 

34 

47 

60 

74 

67 


89 
95 

77 
64 


"Federal  Reserve  Bulletin,  July,  1921,  page  808. 

"  General  Report  on  the  Industrial  and  Economic  Situation  in  Ger- 
many in  December,  1920,  Department  of  Overseas  Trade  of  Great 
Britain,  1921.  Compare  also  with  the  statistics  of  Germany  indebted- 
ness given  on  page  45  above. 

"  These  figures  are  all  taken  from  Proceedings  of  the  League  of 
Nations  International  Financial  Conference,  Brussels,  1920,  Vol.  Ill, 
page  XL 


NATIONAL  BUDGETS  57 

These  are  the  figures  for  every  country  of  any  conse- 
quence in  Europe  for  which  relatively  complete  data  are 
available.  It  will  be  seen  that  not  a  single  nation  outside  of 
Great  Britain  even  nominally  balanced  its  budget  in  1920. 
Even  the  neutrals  are  not  making  ends  meet.  It  should  be 
added  that  these  figures  are  estimates  only ;  and  that  in  many 
cases,  especially  in  central  and  eastern  Europe,  the  final 
returns  will  show  very  much  larger  deficits  than  these  pre- 
liminary figures  would  indicate. 

In  the  year  1921,  moreover,  the  deficits  will  doubtless  be 
larger  than  in  1920,  with  scarcely  an  exception. ^^  As  in  the 
case  of  Great  Britain  and  France,  the  finances  of  almost  all 
European  nations  are  this  year  suffering  severely  because  of 
the  business  depression.  Receipts  from  taxation  will  fall 
below  the  estimates;  and  in  most  nations  expenditures  will 
be  enlarged  in  consequence  of  the  increased  volume  of 
unemployment  insurance  that  must  be  paid. 

The  Burden  of  Taxation 

One  of  the  simple  formulas  which  one  hears  advanced  as 
a  solution  for  the  European  fiscal  problem  is  that  nations 
must  raise  their  taxes  and  courageously  shoulder  the  burdens 
of  war  cost.  It  will  be  instructive,  in  the  light  of  this  sug- 
gestion, to  consider  just  how  heavy  a  taxation  burden  would 
be  required  in  some  of  the  leading  European  countries  if 
budgets  were  to  be  balanced  by  the  process  of  raising  taxes. 

In  the  United  Kingdom,  according  to  recent  estimates 
made  by  Edgar  Crammond,^^  a  British  statistician,  the  cost 
of  national  government  in  Great  Britain  in  1920  absorbed 


"  An  exception  may  perhaps  be  made  for  Italy,  where  inflation  has 
been  continued.  This  means,  merely,  that  Italy  has  yet  to  face  the 
music. 

"  In  an  address  before  the  British  Institute  of  Bankers,  in  June, 
1921 ;  published  in  the  London  Times,  June  28,  1921.  For  further  dis- 
cussion of  Crammond's  analysis,  see  page  132. 


58  THE  SITUATION  AS  IT  REALLY  IS 

approximately  23  per  cent  of  the  national  income.  That 
is  to  say,  out  of  every  $100  earned  by  the  British  people, 
$23  went  to  the  government  in  taxes,  Mr.  Crammond 
further  calculates  that  in  view  of  the  great  shrinkage  in 
national  income  in  consequence  of  declining  values  and  the 
business  depression,  it  will  require  this  year  approximately 
32  per  cent  of  the  national  income  to  pay  the  cost  of  govern- 
ment. He  adds  that  "no  great  industrial  nation  which  has 
such  urgent  need  of  capital  as  Great  Britain  and  whose 
capital  reserves  have  been  so  severely  weakened  by  a  great 
war  could  possibly  afford  anything  approaching  32  per  cent 
of  the  entire  national  income  for  national  services  without 
endangering  the  whole  economic  fabric.  For  four  months 
of  the  year  we  should  all  be  working  simply  for  the  purpose 
of  paying  the  cost  of  government  and  imperial  defense." 
As  we  have  already  seen.  Great  Britain  will  probably  not 
be  able  to  make  ends  meet  this  year. 

In  France  the  total  expenditures,  including  those  for 
pensions  and  reconstruction,  will  this  year  exceed  40  per 
cent  of  the  national  income.  Exclusive  of  the  supposedly 
"recoverable"  expenses,  the  expenditures  will  be  at  least  30 
per  cent  of  the  national  income.  Present  French  tax  receipts 
equal  only  18  per  cent  of  the  national  income. ^^  The  Italian 
situation  is  similar  to  that  of  France.  In  1920  the  expendi- 
tures equaled  30  per  cent  of  the  national  income ;  while  the 
revenues  were  only  13  per  cent.^^ 

As  regards  Germany,  and  the  countries  of  eastern 
Europe  generally,  because  of  the  paucity  of  reliable  data, 
it  is  impossible  to  compute  with  any  degree  of  accuracy  the 
percentage  of  national  income  that  would  be  required  to  meet 
the  present  expenditures.    The  League  of  Nations  Financial 


"  League  of  Nations  International  Financial  Conference,  Brussels. 
1920,  Paper  IV,  page  15. 
^*  Ibid.,  pages  15,  16. 


NATIONAL  BUDGETS  59 

Conference  puts  the  1920  expenditures  of  the  national  gov- 
ernment in  Germany  at  23  per  cent  of  the  national  income 
and  the  revenues  at  12  per  cent.^*^  But  as  we  have  seen  in 
the  analysis  above  (page  55),  the  German  budget  figures 
are  by  no  means  inclusive,  even  apart  from  reparations. 
Including  reparations,  there  is  little  doubt  that  more  than 
50  per  cent  of  the  national  income  of  the  German  people 
would  be  absorbed  to  meet  the  present  expenditures  of  the 
German  national  government  alone.  The  various  state  and 
municipal  expenditures — which  are  more  important  under 
the  federal  governmental  systems  of  Germany  and  the 
United  States  than  they  are  under  the  more  highly  central- 
ized systems  of  France  and  England — constitute  a  heavy 
additional  burden. 

Question  of  Further  Tax  Increase 

In  contemplating  these  figures  of  taxation  burden,  it 
is  important  to  remember  that  the  less  the  national  income 
per  capita  in  any  country,  the  more  heavily  weighs  the  load 
of  taxes.  Wealthy  nations  like  the  United  States  and  Great 
Britain  might  bear  a  taxation  burden  equal  to  25  per  cent  of 
the  national  income,  while  such  a  ratio  might  prove  impos- 
sible in  poorer  countries  like  France  and  Italy.  The  extent 
of  the  variation  in  tax-paying  power  in  different  countries 
may  be  seen  from  the  following  estimates  of  national  income 
in  1920:^^  the  United  States  $700;  the  United  Kingdom 
$445  ;  France  $265  ;  Italy  $130;  and  Germany  $103. 

The  taxes  collected  by  the  federal  government  in  the 
United  States  in  1920  equaled  only  about  8  per  cent  of  the 


"  Ibid. 

"  The  figures  are  all  taken  from  League  of  Nations  International 
Financial  Conference,  Brussels,  1920,  Paper  IV,  page  15.  Later 
(authoritative)  estimates  for  the  United  States  show  only  a  little  over 
$600  per  capita.  Because  of  the  shrinkage  in  values,  1921  figures  will 
everywhere  be  greatly  reduced. 


60  THE  SITUATION  AS  IT  REALLY  IS 

national  income.  Notwithstanding  our  relative  affluence  as 
a  nation,  our  business  and  financial  interests  regarded  this 
load  as  utterly  ruinous,  destructive  to  all  initiative,  and 
promotive  of  rapid  economic  deterioration.  While  our  busi- 
ness community  has  probably  somewhat  exaggerated  the 
magnitude  of  the  existing  taxation  burden,  contemplation  of 
the  American  agitation  for  fiscal  relief  helps  one  to  under- 
stand how  the  impoverished  peoples  of  Europe  must  regard 
their  taxation  problems.  It  makes  one  question  whether  any 
further  increase  of  taxation  is  politically,  or  economically, 
possible.  Indeed  we  shall  find  in  subsequent  discussions  that 
doubt  of  European  ability  to  increase  taxes — at  least  to 
anything  like  the  extent  that  would  be  required  to  meet 
present  expenditures — is  well-founded.  ^^ 

Now  if  budgets  cannot  be  balanced  by  raising  taxes,  the 
only  other  alternative  is  to  reduce  expenditures.  This 
method  has,  of  course,  also  been  urged  upon  the  statesmen 
of  Europe.  Indeed,  the  full  formula  for  fiscal  reform  is 
usually  to  increase  taxes  and  decrease  expenditures  simul- 
taneously, so  as  to  bring  income  and  outgo  into  the  necessary 
equilibrium.  How  difficult,  nay  how  impossible,  it  is  to 
reduce  governmental  expenditures  materially  so  long  as 
present  conditions,  both  political  and  economic,  exist,  will 
also  be  revealed  in  a  subsequent  discussion.  For  the  moment 
we  must  be  content  with  a  mere  statement  of  the  two-horned 
dilemma. 

Burden  of  Domestic  Debts 

There  is  a  widespread  impression,  however,  that  the  inter- 
nal or  domestic  debts  of  a  country  do  not  constitute  a  real 
burden  on  the  people.  Is  not  the  money  that  is  turned  over 
to  the  government  in  the  form  of  taxes  paid  back  to  the 


"See  Chapter  X  on  economic  and  social  disintegration. 


NATIONAL  BUDGETS  6l 

people  themselves  in  the  form  of  interest  on  the  public  debt, 
in  pensions,  etc.?  Now  it  is  undoubtedly  true  that  the  in- 
terest on  the  domestic  debt  and  other  domestic  expenditures 
accrue  to  the  people  of  any  given  country  in  the  form  of 
revenue.  But  the  trouble  with  the  foregoing  impression  is 
that  the  particular  individuals  who  pay  taxes  do  not  usually 
receive  back  in  interest,  pensions,  etc.,  anything  like  the 
precise  amount  of  funds  that  they  have  parted  with  in  the 
form  of  taxes.  Some  receive  a  great  deal  more  from  the 
government  than  they  pay  to  the  government ;  others  receive 
a  great  deal  less.  It  thus  involves  a  wholesale  redistribution 
of  wealth.  This  is,  no  doubt,  particularly  the  case  in  a 
country  such  as  Great  Britain  where  the  tax  burden  on  the 
well-to-do  classes  is  extremely  heavy  and  on  the  poorer 
classes  relatively  light. 

What  happens  under  such  circumstances  is  that  one  class 
of  the  community  furnishes  the  means  whereby  another 
class  is  enabled  to  live  in  idleness — partial  or  complete.  A 
very  large  percentage  of  government  expenditures  goes  for 
past  services,  in  the  form  of  pensions,  or  as  interest  on  funds 
loaned  to  the  government.  Those  who  receive  the  funds  are 
no  longer  rendering  a  quid  pro  quo. 

In  a  country  such  as  France  where  the  national  income 
is  more  evenly  distributed  and  where  the  tax  burden  is  more 
equitably  laid,  this  effect  of  a  huge  domestic  debt  is  not  so 
great.  But  if  France  were  to  undertake  the  task  of  increas- 
ing taxes  sufficiently  to  balance  her  budget,  even  there  the 
burden  on  the  well-to-do  class  would  have  to  be  tremendously 
increased.  Even  there,  moreover,  no  small  percentages  of 
the  government  expenditure  goes  to  reward  past  services  and 
thus  to  permit  people  to  live  without  exerting  present 
economic  effort. 

The  most  serious  result  of  unbalanced  budgets  and 
mounting  national  indebtedness  is  the  effect  upon  the  banking 


62  THE  SITUATION  AS  IT  REALLY  IS 

and  monetary  systems  of  nations,  and  thence  upon  the  whole 
economic  organization.  National  budgets,  persistently 
unbalanced,  will  ultimately  wreck  the  entire  financial  and 
economic  system.  Just  why  and  how  must,  however,  be 
left  for  elucidation  in  subsequent  chapters.  ^^ 


**  See  Chapter  VI  for  a  general  discussion  of  European  banking 
and  monetary  systems;  Chapter  VII  for  the  effects  of  unbalanced 
budgets  upon  the  German  financial  system;  and  Chapter  X  for  a  dis- 
cussion of  the  difficulties  involved  in  balancing  budgets  and  of  the 
effects  thereof  upon  the  whole  social  and  economic  fabric. 


CHAPTER  VI 

THE  EUROPEAN  MONETARY  SITUATION 

European  Central  Banks 

There  has  been  no  end  of  discussion  in  the  literature  of 
post-war  finance  of  the  continued  inflation  of  European 
currencies.  It  is  a  matter  of  common  knowledge  that  many 
of  the  European  countries  have  been  able  to  keep  their 
financial  heads  above  water  only  by  the  continuous  resort  to 
the  desperate  expedient  of  the  printing  press.  The  truth 
is  that  in  nearly  all  of  Europe  east  of  the  Rhine  the  manu- 
facture of  paper  currency  has  proceeded  since  the  Armistice 
at  a  much  more  rapid  rate  than  during  the  war  period  itself, 
and  at  a  rate  that  hardly  finds  a  parallel  in  history.  In  the 
nations  of  western  Europe  the  only  difference  is  one  of 
degree.  This  chapter  analyzes  the  condition  of  the  European 
monetary  and  banking  systems  for  the  light  they  throw 
upon  the  general  economic  situation  in  Europe. 

The  increase  of  paper  money  in  circulation  in  Europe  has 
largely  been  brought  about  by  bank  note  issues.  That  is  to 
say,  the  paper  money  has  been  issued  mainly  by  the  banks 
rather  than  by  the  governments  direct.  Accordingly,  an 
appreciation  of  the  significance  of  the  monetary  situation 
requires  an  understanding  of  the  process  by  which  the  cur- 
rency is  issued  and  of  the  effects  of  such  issues  upon  the 
condition  of  European  bank  reserves.  Only  a  few  relatively 
simple  considerations  are  involved. 

In  each  of  the  European  countries  there  is  a  central  bank, 
comparable  in  its  functions  to  the  federal  reserve  banks  of 
the  United  States.  In  brief,  these  central  banks  are  bankers* 
banks,  that  is  to  say,  they  make  loans  to  and  hold  deposit 

63 


64  THE  SITUATION  AS  IT  REALLY  IS 

accounts  for  the  individual  private  banks,  much  as  the  indi- 
vidual banks  make  loans  to  and  hold  deposits  for  private 
individuals.  In  normal  times  the  ordinary  banks  do  not 
need  to  borrow  much  from  the  central  institutions,  as  they 
have  sufficient  funds  of  their  own  to  take  care  of  all  business 
requirements.  But  whenever  there  arises  a  very  active 
demand  for  money,  these  banks  are  compelled  to  borrow  the 
additional  funds  required  from  the  central  banks,  whose 
duty  it  is  to  maintain  large  reserves  for  just  such 
emergencies. 

Currency  Inflation 

When  early  in  the  war  there  arose  an  abnormal  demand 
for  funds  with  which  to  finance  the  production  of  war 
materials,  it  immediately  became  necessary  for  the  individual 
banks  to  enlarge  their  borrowings  from  the  central  reserve 
institutions.  Now  since  on  the  continent  of  Europe  it  is 
customary  to  employ  bank  notes  rather  than  checking 
accounts,  borrowing  from  the  central  bank  usually  resulted 
in  an  issue  of  central  bank  notes  to  the  individual  bank. 
These  notes  were  in  turn  loaned  out  by  the  individual  banks 
for  the  purposes  of  business.  If  it  had  not  been  for  the 
steadily  rising  prices  during  the  war  and  the  period  which 
followed,  the  expansion  of  loans  by  this  process  would  not 
have  continued  indefinitely.  But  the  higher  prices  rose  and 
the  more  wages  advanced,  the  more  funds  it  took  to  finance 
a  given  volume  of  business.  ^  Accordingly,  every  business 
man  had  steadily  to  increase  the  volume  of  his  borrowing 
from  banks,  and  in  turn  every  individual  bank  had  steadily 


^  There  is  divided  opinion  among  students  of  finance  as  to  whether 
the  rise  in  prices  was  caused  by  the  expansion  of  loans.  One  group 
holds  that  if  the  banks  had  refused  to  advance  loans,  prices  would  not 
have  risen  and  the  additional  volume  of  funds  would,  therefore,  not 
have  been  required;  another  group  holds  that  prices  rose  for  other 
reasons  and  that  the  expansion  of  loans  was  a  result  rather  than  a 
cause  of  rising  prices. 


THE  EUROPEAN  MONETARY  SITUATION  65 

to  increase  the  volume  of  its  borrowing  from  the  central 
bank. 

At  the  same  time,  the  various  governments  when  in  need 
of  funds  usually  found  it  more  expedient  to  borrow  the 
amounts  required  from  the  central  banks  than  to  raise  them 
exclusively  through  taxation.  Moreover,  when  government 
bonds  were  sold  to  the  general  public,  a  considerable  per- 
centage of  the  funds  used  in  buying  them  was  borrowed 
from  the  central  bank.  The  process  may  perhaps  best  be 
made  clear  by  reference  to  what  happened  in  the  United 
States,  where  similar  financial  methods  were  followed. 

The  people  were  asked  to  borrow  on  the  security  of 
previous  Liberty  bonds,  or  other  collateral,  to  the  limit  of 
their  capacity,  and  to  invest  the  funds  thus  procured  in 
Liberty  bonds.  The  banks  from  which  the  people  borrowed, 
in  turn,  secured  the  funds  which  they  loaned  through  bor- 
rowing from  the  federal  reserve  banks,  on  Liberty  bonds 
as  collateral.  The  individual  banks  also  invested  huge  sums 
in  Liberty  bonds  on  their  own  account,  again  borrowing  the 
funds  from  the  reserve  banks.  ^  It  must  be  noted,  in  this 
connection,  that  the  funds  which  are  thus  drawn  from  the 
reserves  of  the  central  banks  constitute  additional  money  in 
circulation.  The  process  described  is  what  is  commonly 
known  as  currency  inflation. 

Bank  Reserves 

Now  all  this  borrowing  from  the  banking  institutions 
naturally  reduced  the  reserves  of  the  central  banks.  A  few 
words  are  necessary  as  to  the  meaning  of  reserves.  Experi- 
ence has  demonstrated  that  if  a  bank  has  notes  (that  is, 
promises  to  pay  cash)   outstanding  in  the  hands  of  indi- 

'  There  is  also  divided  opinion  among  students  of  finance  as  to 
the  merits  of  this  method  of  financing  the  war.  We  are,  however, 
interested  here  only  in  showing  the  effects  of  the  process  upon  the  con- 
dition of  bank  reserves. 


66  THE  SITUATION  AS  IT  REALLY  IS 

viduals  of  $100,000,  for  example,  it  is  not  necessary  for  it 
to  hold  as  much  as  $100,000  in  specie  as  a  reserve  for 
redeeming  them.  This  is  because  there  is  little  possibility 
that  all  of  the  notes  will,  at  any  one  time,  be  presented  for 
payment  in  cash.  It  is  merely  necessary  for  the  bank  to 
keep  on  hand  such  an  amount  of  specie  as  experience  has 
shown  is  necessary  to  enable  it  at  all  times  to  meet  the 
actual  demands  that  develop.  In  England  and  in  the  United 
States  where  checking  (deposit)  accounts  are  mainly  used 
instead  of  notes,  the  same  principle  holds.  It  is  unnecessary 
for  a  bank  to  keep  a  reserve  against  the  deposits  of  indi- 
viduals equal  to  100  per  cent  of  such  deposits;  it  is  necessary 
to  keep  only  such  a  percentage  of  cash  to  deposits  as  ex- 
perience has  shown  will  enable  the  bank  always  to  be  in  a 
position  to  pay  cash  when  it  is  demanded. 

The  same  principle  also  holds  with  reference  to  the 
reserve  of  the  central,  or  bankers'  banks.  They  must  keep 
only  such  ratio  of  cash  to  notes  and  deposits  as  experience 
has  shown  to  be  necessary  in  order  to  maintain  specie 
pa3Tnents. 

It  will  be  seen  at  once  that  since  the  individual  banks  can 
borrow,  when  in  need  of  additional  cash,  from  the  central 
banking  institutions,  they  do  not  have  to  keep  very  much 
cash  on  hand.  The  truth  is  that  not  more  than  5  per  cent 
of  the  amount  of  the  outstanding  deposits  and  notes  is 
usually  kept  by  individual  banks  in  the  form  of  cash.  But 
since  the  central  reserve  banks  have  no  similar  borrowing 
resources,  they  must  necessarily  keep  much  larger  reserves. 
In  the  United  States  the  law  requires  a  minimum  reserve  in 
the  federal  reserve  banks  of  about  40  per  cent  against  notes 
and  deposits.  ^  But  it  is  the  policy  of  the  federal  reserve 
managers  to  keep  reserves  in  ordinary  periods  very  greatly 


'To  be  precise  it  is  40  per  cent  against  federal  reserve  notes  and 
35  per  cent  against  deposits. 


THE  EUROPEAN  MONETARY  SITUATION  67 

In  excess  of  this  amount,  in  order  that  in  time  of  emergency 
they  may  be  able  to  issue  more  notes  and  lend  more  money  to 
the  member  banks  than  would  otherwise  be  possible.  In  Eur- 
ope it  is  not  usually  customary  for  the  law  to  fix  a  legal  mini- 
mum reserve ;  but  the  practice  has  nevertheless  been  for  the 
managers  of  the  central  reserve  institutions  to  keep  very 
high  reserves,  usually  from  50  to  70  or  80  per  cent,  the 
percentages  varying  somewhat  at  different  times  and  in 
different  countries. 

Effect  of  War  Finance  upon  Reserves 

Such  was  the  condition  of  affairs  at  the  outbreak  of  the 
European  war.  The  great  demand  for  funds  that  shortly 
developed,  however,  resulted  in  a  rapid  lessening  of  the 
ratio  of  gold  reserves  to  outstanding  claims  against  gold.  It 
was  early  seen  that  the  financial  strain  would  be  extremely 
heavy,  and  as  a  means  of  conserving  the  gold  supply  the 
various  European  central  banks  soon  suspended  specie  pay- 
ments. That  is  to  say,  they  refused  to  redeem  the  paper 
currency  in  gold  when  it  was  presented  at  the  bank  for  pay- 
ment. Paper  currency  thus  ceased  to  be  interchangeable 
with  gold;  it  became  irredeemable,  and  it  depreciated  in 
value  as  the  chance  for  an  ultimate  resumption  of  specie 
payments  became  more  and  more  remote. 

The  aggregate  gold  holdings  of  the  central  banks  of 
Europe  were  actually  increased  in  consequence  of  this  refusal 
of  the  banks  to  part  with  gold,  on  the  one  hand,  and,  on  the 
other,  because  of  the  actual  transference  of  gold  from  the 
channels  of  commerce  to  the  coffers  of  the  banks.  But  it 
nevertheless  proved  impossible  in  all  of  the  belligerent 
countries  to  prevent  a  decrease  in  the  percentage  of  gold 
reserves  to  notes  and  deposits,  on  account  of  the  numerous 
outpourings  of  paper  currency. 

For  similar  reasons,  the  reserves  of  the  federal  reserve 


68  THE  SITUATION  AS  IT  REALLY  IS 

banks  of  the  United  States  were  drawn  down  during  the 
course  of  the  war  from  a  maximum  of  nearly  90  per  cent  to 
about  52  per  cent  at  the  time  of  the  Armistice.  The  reserves 
of  the  central  banks  of  the  European  belligerents  were  in 
most  cases  reduced  much  further  during  the  war  than  were 
those  of  the  federal  reserve  banks  in  the  United  States.  This 
was  because  of  the  smaller  original  pre-war  ratio  of  gold  to 
outstanding  note  and  deposit  liabilities  in  the  European 
banks,  and  because  of  the  greater  intensity  of  the  financial 
strain  in  consequence  of  Europe's  longer  participation  in  the 
struggle. 

The  data  in  the  table  below  show  the  changes  which 
occurred  in  the  percentage  of  gold  and  silver  reserves  to 
note  and  deposit  obligations  in  the  leading  nations  of  the 
world,  from  the  time  each  entered  the  war  until  (with  the 
few  exceptions  noted)  the  spring  of  1920.  *  This  table  will 
at  once  reveal  the  disastrous  effects  of  war  finance  upon  the 
banking  systems  of  the  world,  and  provide  a  background 
for  a  consideration  of  the  trend  of  monetary  development 
in  the  several  European  countries  during  the  past  twelve 
months. 

The  War's  Effect  on  World  Banking  Systems 
(000,000  omitted) 

Gold  and  Note  and 

Silver  Deposit  Reserve 

Country                     Holdings  Obligations  Percentage 

1914       1920  1914       1920  1914        1920 
(A)    Allied  Powers 

United   States    (a)..  $  947    $2,078  $1,064    $5,907  89.0%    42.2%   (b) 

Great  Britain    186         547  472      1,131  39.4        48.4       (c) 

France    920      1,122  1,547      7,986  59.5        14.1 

Italy  (d)    288         222  462      2,891  62.3          ^.^ 

*  The  table  is  compiled  from  data  assembled  by  Louis  Ross  Gottlieb, 
published  in  the  Bankers  Statistics  Corporation,  New  York,  1920,  in  an 
article  entitled,  "The  Banking  Situation  of  Foreign  Countries." 


THE  EUROPEAN  MONETARY  SITUATION  69 

Gold  and  Note  and 

Silver  Deposit  Reserve 

Country                     Holdings  Obligations  Percentage 

1914       1920  1914       1920  1914        1920 
(A)     Allied  Powers — Continued 

Russia  (e)  937      i,948  1,408    11,236  66.5        i7-3 

Japan 109         467  239      1,306  45.6        35.8 

Belgium    61           69  240      1,395  25.4         4.9 

Greece    45         286  89         470  50.6        60.9 

Roumania    41         293  89      1,280  46.1        22.9 

Portugal    18           29  98         447  18.4          6.5 

Finland   7            8  28         259  25.0         31 

Total  Allied  Powers  $3,559    $7,069    $5,736  $34,308    62.0        20.6 

(B)  Central  Powers 

Germany    $  402  $   255  $   675  $iS,339  59-6  1.7 

Austria-Hungary    ...  3^^  58  49i     I3,443  63.5  0.4 

Turkey   21  46  75           92  28.0  50.0 

Bulgaria   25  13  80         615  3i-3  2.1 

Total  Central  Powers  $   760    $   372    $1,321  $29,489    57.5  1.3 

Total  Active 
Belligerents    $4,319    $7,44i    $7,057  $63,797    61.2        11.7 

(C)  Neutral  Powers 

Total   Neutrals    (f).  $   765    $i,559    $1,325  $  3,242    57-7        48.1 
Grand  Total   $5,084    $9,000    $8,382  $67,039    60.1        13.4 

(a)  Figures  for  the  United  States  are  for  March  30,  ipi?-    They  include  only  the 
federal  reserve  banks. 

ib)  The  ratio  is  computed  on  the  basis  of  gross  deposits, 
c)  The  British  reserve  ratio  here  appears  to  be  higher  than  it  really  is;  for  the 
"currency  notes,"  amounting  to  $139,000,000,  which  are  issued  by  the 
government  instead  of  the  Bank  of  England,  are  not  included.  If  these  be 
included,  the  reserve  ratio  is  cut  in  two.  See  special  table  on  the  following 
page. 

(d)  Figures  are  for  the  three  Italian  banks  of  issue.    Legal  tender  notes  are  included 

in  the  gold  and  silver  holdings. 

(e)  The  Russian  figures  are  for  October,  1917.    At  the  present  time  the  returns 

would,  of  course,  be  wholly  different. 

(f)  The  neutral  nations  include:  Argentina,  Brazil,  Denmark,  Netherlands,  and 

Switzerland. 


Banking  Position  in  Great  Britain 

In  Great  Britain  both  the  Treasury  and  the  Bank  of 
England  have  issued  currency  with  which  to  finance  the 


70  THE  SITUATION  AS  IT  REALLY  IS 

requirements  of  war  and  reconstruction.  Hence  the  com- 
bined accounts  of  the  Bank  and  the  Treasury  given  in  the 
following  table  will  best  reveal  the  true  financial  status  of  the 
country  and  the  drift  during  the  past  year.  ^ 

(£000,000  omitted) 

Currency  Govt. 

Bank        Notes  &  Coin  &  Floating 

Notes    Certificates  Deposits    Bullion      Reserve*  Debt 

1913,  average  —  £29  £57  £38  44-2% 

1920,  Jan.,  84  £330  155  128  22.5  £1,319 

1920,  June 107  357  192  146  22.3  1,294 

1920,  Dec 113  367  190  157  23.4  1,408 

1921,  June 110  324  147  157  27.0  1,374 

*  Ratio  of  coin  and  bullion  to  notes  and  deposits. 

For  the  first  year  and  a  half  after  the  Armistice,  the 
volume  of  outstanding  notes  and  deposits  rapidly  increased, 
and  the  reserve  percentage  touched  bottom  in  June,  1920. 
Although  outstanding  liabilities  expanded  until  the  end  of 
1920,  the  increase  in  coin  and  bullion  was  enough  to  raise 
the  reserve  ratio  about  one  per  cent.  The  first  six  months 
of  1 92 1  reveals  a  reduction  in  both  bank  and  currency  notes, 
and  deposit  obligations,  with  a  resulting  material  improve- 
ment in  the  reserve  ratio. 

The  floating  debt  of  the  government,  consisting  mainly 
of  Treasury  bills,  or  short-time  promises  to  pay,  also 
decreased  somewhat  during  the  first  half  of  the  current  year 
(1921),  although  the  amount  now  is  larger  than  it  was 
twelve  months  ago.  It  is  not  improbable  that  the  second  half 
of  1 92 1  will  show  a  new  increase,  in  consequence  of  current 
budget  difficulties,  discussed  in  the  preceding  chapter. 

Banking  Situation  in  France 

French  financial  statistics  have  not  been  complicated  by 
government  notes,  all  issues  having  been  made  through  the 

*Data  taken  from  Federal  Reserve  Bulletins. 


THE  EUROPEAN  MONETARY  SITUATION  7 1 

Bank  of  France.    The  following  table  giving  the  condition 
of  the  Bank  of  France  shows  the  trend  of  French  banking  :^ 

(In  francs,  000,000  omitted) 

Note  Deposit  Gold  and  Reserve* 

Circulation  Obligations  Silver  Ratio 

1913,  Dec 5,723  984  4,164  62.1% 

19 1 8,  Dec 30,200  2,484  3,765  11.5 

1919,  Dec 37,336  3,211  3,874  9.5 

1920,  June    37,915  3,751  3,972  9,5 

1920,  Dec 37,902  3,575  3,8i8  9.3 

1921,  June    37422  2,861  3,846  9.5 

*  Gold  and  silver  to  note  circulation  and  deposit  obligations. 

It  will  be  seen  that  although  the  reserve  percentage  has 
improved  slightly  during  the  past  year,  the  ratio  is  still 
lower  than  it  was  at  the  time  of  the  Armistice.  While  the 
note  circulation  has  declined  but  little,  there  has  been  a 
material  reduction  in  deposit  obligations  since  the  end  of 
1920. 

Italian  Financial  Situation 

The  following  data  "^  show  the  condition  of  Italian  bank- 
ing: 

(In  lire,  000,000  omitted) 

Note  Deposit  Gold  Reserve* 

Circulation      Obligations      Reserve  Ratio 

1913,  Dec 2,284  318  1,661  63.9% 

1920,  Jan 15,634  2,376  2,021  11.2 

1920,  June    17,817  2,379  2,110  10.S 

1920,  Dec 19,731  2,559  2,077                 9-3 

1921,  March   18,765  2,461  2,043                 9.6 

1921,  June  18,159  2,366  1,989                9.7 

*  Gold  reserve  to  note  circulation  and  deposit  obligations. 

®Data  taken  from  Federal  Reserve  Bulletins. 

'The  figures  are  for  the  Italian  banks  that  are  privileged  to  issue 
notes.  They  diflfer  somewhat  from  those  on  page  68,  because  they  in- 
clude foreign  specie  holdings. 


72  THE  SITUATION  AS  IT  REALLY  IS 

The  Italian  situation,  it  will  be  seen,  resembles  very 
closely  that  of  France.  There  has  been  a  slight  improve- 
ment in  the  reserve  ratio  during  the  past  year  (1921). 

Banking  Situation  in  Germany 

The  following  data  show  the  trend  of  banking  conditions 
in  Germany  during  and  since  the  war.  The  figures  are  for 
the  central  Reichsbank : 

(In  marks,  000,000  omitted) 

Notes  in  Gold  Reserve* 

Circulation  Deposits  Reserve  Ratio 

1913,  Dec 1,958                   668  1,068  40.7% 

1918,  Dec.    31 22,206  13,828  2,281  6.3 

1919,  Dec.    31 35,723  17.095  1,109  2.1 

1920,  Dec.    31 66,806  22,327  1,093  1.2 

1921,  May    31 71,839  14,093  1,093  1.3 

1921,  July    31 77,391  15,814  1,093  1.17 

*  Gold  reserve  to  note  circulation  and  deposit  obligations. 

The  figures  for  Germany  reveal  an  appalling  situation. 
The  enormous  expansion  in  note  issues  and  deposits  carried 
the  reserve  ratio  down  from  40.7  to  6.3  per  cent  during  the 
period  of  the  war.  Since  the  Armistice  the  gold  supply  of  the 
Reichsbank  has  been  cut  in  two,  and  the  volume  of  outstand- 
ing notes  and  deposits  has  been  considerably  more  than 
doubled.  During  the  single  year  1919,  the  note  issues  of  the 
Reichsbank  were  increased  over  60  per  cent,  and  in  the  year 
1920  almost  100  per  cent. 

There  is  still  another  form  of  paper  currency  in  Germany, 
known  as  darlehnkassenscheine.  ^  These  notes  are  issued 
by  certain  so-called  "loan  banks."  Though  they  are  now 
permitted  to  be  used  as  reserve  money,  they  are  not  re- 
deemable in  gold.     The  volume  at  present  in  circulation  is 

*  For  a  further  statement  with  reference  to  these  notes,  see   foot- 
note on  page  83. 


THE  EUROPEAN  MONETARY  SITUATION  73 

8,358,000,000  marks.  To  measure  the  full  extent  of  the 
inflation  in  Germany  this  figure  should  be  added  to  the 
totals  in  the  above  table. 

Reserves  of  Other  Countries 

There  is  no  need  of  going  into  detailed  figures  for  other 
European  countries.  It  is  enough  to  point  out  that  the 
condition  of  Belgium  and  of  neutral  countries  resembles 
that  of  France  and  Italy,  in  that  the  volume  of  outstanding 
notes  and  deposits  has  ceased  to  expand  within  the  past  year 
and  the  proportion  of  gold  to  paper  money  is  now  increas- 
ing slightly.  The  minor  countries  of  central  and  eastern 
Europe  are  in  most  cases  in  a  worse  condition  than  Germany. 
The  manufacture  of  paper  money  is  still  a  major  industry, 
and  gold  reserves  are  still  rapidly  declining. 

Inflation  Still  Unchecked 

Many  American  students  of  European  conditions  contend 
that  European  inflation  has  now  been  definitely  checked; 
and  they  find  in  this  asserted  fact  the  most  hopeful,  single 
evidence  of  European  recovery.  This  oft-repeated  state- 
ment is  not  true.  Inflation  is  as  violent  as  ever  in  central 
and  eastern  Europe,  and  continues  everywhere  on  the  con- 
tinent, notwithstanding  the  figures  in  the  foregoing  tables. 

To  understand  why  the  assertion  that  inflation  remains 
unchecked  can  be  made  in  the  face  of  the  evidence  that  bank 
note  obligations  have  ceased  to  expand  in  western  Europe, 
one  must  appreciate  that  there  are  two  kinds  of  inflation. 
The  first  results  from  rising  prices  and  booming  business, 
with  heavy  borrowing  from  banks  by  business  and  com- 
mercial interests.  It  may  be  designated  as  "commercial" 
inflation.  The  second  results  from  government  borrowing 
for  the  purpose  of  meeting  government  deficits.  It  may 
be    called    "governmental,"    or    "fiscal"    inflation.      Now 


74  THE  SITUATION  AS  IT  REALLY  IS 

it  is  only  the  former  type  of  inflation  that  has  been 
checked. 

The  business  depression  and  accompanying  price  Hquida- 
tion  has,  in  Europe  as  in  the  United  States,  very  greatly 
reduced  the  demands  made  upon  the  banks  for  commercial 
and  business  loans.  The  business  depression  has  checked 
business  inflation;  but  it  has  not  checked  government  infla- 
tion. Indeed,  the  business  depression,  through  increasing 
the  amount  of  the  government  Treasury  deficits,  will  this 
year  cause  a  greater  recourse  to  government  loans  from  the 
banks — in  nearly  every  European  country — than  at  any  time 
heretofore.    Fiscal  inflation  is  on  the  increase. 

The  total  volume  of  outstanding  notes  of  the  Bank  of 
France,  for  example,  has  declined  slightly  since  last  autumn. 
But  this  merely  indicates  that  the  reduction  in  the  volume  of 
note  issues  for  commercial  purposes  has  during  this  period 
been  somewhat  greater  than  the  increase  in  the  volume  of 
note  issues  for  government  fiscal  purposes.  Now  when  the 
process  of  business  liquidation  shall  have  run  its  course, 
there  will  be  no  further  reduction  in  the  volume  of  business 
borrowing.  And  thereafter,  so  long  as  government  borrow- 
ing for  the  purposes  of  balancing  budgets  continues,  the 
volume  of  outstanding  note  issues  will  again  increase  and 
reserves  will  again  fall. 

Germany  and  other  central  and  eastern  European  (coun- 
tries now  differ  from  those  of  western  Europe  chiefly  in  that 
in  them  the  expansion  of  government  borrowing  has  more 
than  offset  the  recent  contraction  of  business  borrowing.  ^ 
This  is  mainly  because  the  budgets  of  these  countries  are  less 
nearly  balanced  than  are  those  of  the  western  belligerents. 
In  consequence,  the  total  of  outstanding  notes  continues  to 
expand,  even  in  the  face  of  business  depression. 


*  That  there  has  been  commercial  contraction  in  Germany  may  be 
seen  from  the  decline  of  deposits,  as  shown  in  the  table  on  page  ^2. 


THE  EUROPEAN  MONETARY  SITUATION  75 

General  Conclusions 

What,  now,  are  we  to  conclude  from  this  analysis  ?  What 
if  the  volume  of  outstanding  notes  and  deposits  is  enormous; 
what  if  the  reserve  percentage  is  unprecedentedly  low,  and  in 
a  large  part  of  Europe  still  declining  ?  Does  the  present  situa- 
tion necessarily  foreshadow  disaster?  Of  England  it  may 
be  dogmatically  stated  that  there  is  littje  occasion  for  alarm, 
so  far  as  the  purely  banking  aspects  of  the  situation  are  con- 
cerned. The  reserve  is  increasing  steadily — in  aggregate 
volume — ^and  the  percentage  of  gold  to  paper  money  is 
steadily  increasing.  The  Bank  of  England  is  headed  in  the 
right  direction — moving  toward  a  condition  where  specie 
payments  can  be  resumed  and  the  British  monetary  system 
restored  to  a  gold  basis.  That  the  progress  will  be  slow, 
however,  is  evident  from  the  renewed  borrowing  by  the 
government  from  the  Bank  of  England  in  recent  months — 
in  consequence  of  the  severe  business  depression  and  the 
resulting  decline  in  receipts  from  taxation. 

The  same  conclusion  does  not  hold,  however,  in  regard 
to  continental  Europe.  The  condition  of  the  central  banks 
of  France,  Belgium,  and  Italy  is  such  that  it  will  be  many 
years,  at  best,  before  specie  payments  can  possibly  be  re- 
sumed. Indeed,  there  are  many  who  believe  that  it  will  be 
quite  impossible  for  them  ever  to  restore  the  pre-war  gold 
value  of  their  currencies.  It  is  pointed  out  that  no  bank  in 
history — in  similar  condition — has  ever  succeeded  in  build- 
ing up  a  gold  reserve  and  in  reducing  outstanding  note 
issues  sufficiently  to  permit  the  resumption  of  specie 
payments. 

The  principal  reasons  for  doubting  the  ability  of  these 
nations  to  resume  specie  payments  and  thus  to  restore  the 
pre-war  value  of  their  paper  currencies,  is  the  budget  situa- 
tion discussed  in  Chapter  V.  Unless  budgets  can  be 
balanced  there  is  no  escape  from  a  progressive  deterioration 


76  THE  SITUATION  AS  IT  REALLY  IS 

of  the  banking  position.  This,  of  course,  applies  equally 
well  to  the  neutral  countries. 

Unless  the  truth  of  this  observation  is  clearly  perceived, 
one  cannot  reach  a  full  understanding  of  the  gravity  of  the 
European  situation.  Unbalanced  budgets  will  in  time  wreck 
the  entire  monetary  and  banking  situation.  Moreover,  so 
long  as  irredeemable  paper  remains  the  basis  of  values  in 
Europe,  prices  will  remain  unstable,  and  foreign  exchange, 
for  reasons  discussed  in  Chapter  II,  will  remain  depreciated 
and  continue  to  fluctuate  to  the  serious  detriment  of  both 
foreign  and  domestic  business. 

In  Germany  the  depreciation  of  the  currency  and  the 
demoralization  of  the  financial  system  has  already  reached 
an  acute  stage.  The  German  financial  situation  represents 
an  intermediate  stage  between  that  of  the  distressed 
countries  of  western  Europe  and  the  bankrupt  countries  of 
the  east.  It,  therefore,  offers  an  excellent  opportunity  for 
an  analysis  of  the  process  whereby  a  nation  whose  budget  is 
seriously  unbalanced  and  which  is  committed  to  the  unlimited 
issue  of  home-grown  currency,  must  inevitably  end  in 
financial  disaster.  Accordingly,  the  succeeding  chapter  is 
devoted  to  a  study  of  the  future  of  German  currency. 


CHAPTER  VII 

THE  GERMAN  MONETARY  COLLAPSE 

Additions  to  Gold  Supply  Impossible 

Whatever  may  be  the  ultimate  outcome  of  the  monetary 
and  banking  situation  in  western  Europe,  there  is  little  doubt 
of  the  future  in  Germany  and  in  the  other  nations  of  central 
and  eastern  Europe.  It  is  impossible  to  conceive  how  these 
countries  can  ever  reach  a  position  where  they  can  redeem 
the  present  outstanding  currencies. 

Progressive  deterioration  of  the  reserve  and  progressive 
depreciation  of  the  currency  appear  inevitable.  Of  such 
tremendous  importance  is  a  clear  understanding  of  what 
lies  in  store  for  central  and  eastern  Europe  to  an  apprecia- 
tion of  the  whole  problem  of  European  rehabilitation,  that 
a  careful  analysis  of  Germany's  inevitable  financial  future 
is  required. 

In  the  first  place,  it  is  impossible  for  the  Reichsbank  to 
increase  its  gold  holdings.  Practically  all  of  the  gold  supply 
of  Germany  is  now  in  the  Reichsbank;  there  is  no  more 
that  can  be  withdrawn  from  the  channels  of  circulation. 
And  since  Germany  is  not  a  gold-producing  country,  she 
can  add  to  her  total  stock  of  gold  only  by  importing  it.  Let 
us  see  what  this  involves. 

In  the  previous  discussion  of  the  foreign  exchange 
mechanism,  ^  it  was  shown  that  gold  will  flow  to  a  nation 
only  when  the  volume  of  exports  exceeds  the  volume  of 
imports — allowance,  of  course,  being  made  for  the  other 
items  entering  into  the   international   scale-pans.      But  in 


^  See  Chapter  II. 

77 


78  THE  SITUATION  AS  IT  REALLY  IS 

the  case  of  Germany,  under  present  conditions,  no  gold  can 
be  received  until  the  exports  exceed  the  imports  by  more  than 
the  amount  of  the  annual  reparations  payments,  which,  as 
will  be  seen  in  later  discussion,  can  in  the  main  be  made  only 
by  the  shipment  of  goods  abroad.  The  subsequent  dis- 
cussions of  the  terms  of  the  reparation  settlement  will  indi- 
cate that  for  something  like  a  half  century  Germany  cannot 
expect  to  receive  any  appreciable  inflow  of  gold. 

Deflation  of  Currency 

Could  Germany,  by  reducing  her  outstanding  circulation 
sufficiently,  resume  specie  payments?  Suppose  we  consider 
first  the  possibility  of  resumption  upon  the  basis  of 
Germany's  existing  gold  supply — assuming,  for  the  time 
being,  that  none  of  it  is  exported  in  reparations  payments. 
To  what  extent  would  the  German  currency  have  to  be 
deflated  in  order  to  make  possible  a  return  to  the  pre-war 
gold  standard?  In  the  United  States  a  minimum  of  40 
per  cent  reserve  in  the  federal  reserve  banks  is  considered 
essential  to  the  maintenance  of  specie  payments.  Before  the 
war  the  German  banking  law  required  a  reserve  of  at 
least  33  per  cent  against  outstanding  notes.  Much  more 
than  this  was,  in  fact,  ordinarily  maintained.  While  other 
leading  countries  required  no  definite  reserve,  practical  ex- 
perience had  in  all  cases  led  to  the  maintenance  of  large 
specie  holdings.  ^  But  it  is  doubtless  possible  to  effect  a 
restoration  of  gold  redemption  on  a  much  narrower  gold 
basis  than  was  formerly  the  case.  Assume,  therefore,  that 
the  accumulation  of  a  reserve  of  20  per  cent  would  be  suffi- 
cient. What  amount  of  deflation  would  this  require,  and 
what  would  be  involved  in  the  process? 

The  amount  of  outstanding  Reichsbank  notes  now  stands 
at  over  80  billion  marks,  and  the  reserve  at  slightly  more 

*  See  table  on  page  68  for  the  reserve  in  1914. 


THE  GERMAN  MONETARY  COLLAPSE  79 

than  I  billion  marks.  (The  outstanding  deposit  claims 
amounting  to  more  than  14  billion  marks  are  here  omitted 
from  consideration.)  To  make  the  reserve  of  i  billion  marks 
equal  to  20  per  cent  of  the  note  issues  would  require  a 
reduction  of  the  notes  to  5  billion  marks.  Sixty-five  billion 
marks,  over  80  per  cent  of  the  entire  monetary  supply,  would 
have  to  be  eliminated  from  circulation. 

To  understand  the  full  significance  of  so  drastic  a  con- 
traction of  the  currency,  it  must  be  recognized  that  it  would 
involve  a  reduction  of  bank  loans  to  roughly  one- fourteenth 
of  the  present  total.  Such  a  drastic  reduction  of  loans 
would  produce  complete  business  prostration  and  result  in 
almost  universal  unemployment.  It  would  also  involve  the 
cessation  of  unemployment  insurance  and  pensions,  and  a 
failure  to  cover  by  new  loans  the  huge  governmental  and 
railway  operating  deficits.^  No  government  could  last  which 
resolutely  undertook  any  such  contraction  of  bank  loans;  the 
certain  results  of  attempting  it  would  be  political  revolution. 

If  the  contraction  were  sought  to  be  effected  only  very 
gradually — say  in  fifty  years — there  would  merely  be  a 
prolongation  of  the  agony  of  deflation,  and  an  apparently 
perennial  era  of  desperately  hard  times.  Prosperity  never 
accompanies  contraction  of  currency  and  falling  prices. 
Neither  the  Germans  nor  any  other  people  will  submit  to  a 
prolonged  period  of  hard  times  and  unemployment,  when  the 
power  of  restoring  business  activity  through  a  renewal  of 
inflation  is  ready  at  hand. 

Argument  Against  Deflation 

There  is  another  reason  why  a  return  to  gold  redemption 
of  the  existing  currency  will  not — many  students  say,  should 
not — be  undertaken.     The  existing  government  debts  have 

"The  railway  operating  deficit  in  1921  was  over  9  billion  marks. 
Incidentally,  these  deficits  would  also  make  the  pasrment  of  reparations 
impossible. 


80  THE  SITUATION  AS  IT  REALLY  IS 

largely  been  contracted  on  the  basis  of  highly  inflated  values. 
And  to  reduce  prices,  and  hence  money  wages  and  profits, 
to  a  pre-war  basis,  or  to  anything  approximating  a  pre-war 
basis,  would  enormously  increase  the  difficulty  of  raising  the 
necessary  taxes.  The  point  is  that  the  interest  on  the  public 
debt  would  not  be  reduced  as  the  result  of  deflation,  while 
the  wages  and  profits  out  of  which  tax  revenues  must  come 
would  be  reduced. 

The  following  statement  substantially  as  made  by  the 
Right  Hon.  R.  McKenna,  Chairman  of  the  London  Joint 
City  and  Midland  Bank,  will  indicate  what  would  be 
involved  in  deflation,  even  in  England,  where  the  price  level 
now  stands  at  only  twice  the  pre-war  figures :  The  two 
items  of  interest  on  the  public  debt,  £350,000,000,  and  war 
pensions,  £120,000,000,  would,  if  prices  and  profits  were 
reduced  to  a  pre-war  level,  call  for  a  tax  of  over  13  shillings 
in  the  pound,  "a  rate  absolutely  impossible  for  any  country 
to  bear."  Thirteen  shillings  in  the  pound,  it  may  be  ex- 
plained, means  roughly  60  per  cent  of  the  national  income. 
The  other  governmental  revenue  required  would  be 
additional  to  this.  In  Germany  and  France  the  difficulty 
would,  of  course,  be  intensified  many  fold. 

If  a  deflation  of  prices  and  values  back  to  pre-war  levels 
should  occur,  it  would  be  necessary  to  scale  down  in  some 
way  the  public  debts.  This  might  be  done  either  by  repudiat- 
ing them  wholly  or  in  part,  or  by  reducing  the  rate  of  in- 
terest, paying  in  Germany,  for  example,  perhaps  the 
equivalent  of  one  cent  on  the  dollar.  Such  a  proceeding  is, 
however,  beset  with  great  political  danger.  It  would  arouse 
bitter  opposition  among  certain  groups.  Human  beings  like 
to  have  taxes  reduced;  but  they  regard  a  scaling  down  of  in- 
terest payments  as  a  species  of  governmental  robbery. 

Even  if  the  government  debts  could  be  scaled  down,  this 
would   not   end   the   difficulties.      Private    obligations   of 


THE  GERMAN  MONETARY  COLLAPSE  8l 

stupendous  amounts  have  been  incurred  since  the  currency 
became  inflated.  Corporations  could  not  possibly  pay  in- 
terest and  dividends  on  capitalizations  contracted  on  the 
basis  of  values  that  obtained  in  Germany  in  1920,  if  profits 
in  terms  of  money  were  to  be  reduced,  for  example,  ten- 
fold. All  private  corporations  would  in  consequence  have 
either  to  scale  down  their  interest  charges  by  some  device, 
or  else  reduce  their  outstanding  bonds  and  shares.  The 
attempt  to  undertake  this  would,  of  course,  only  serve  to 
intensify  business  and  financial  uncertainty. 

Stabilization  of  Present  Prices 

Considerations  such  as  the  foregoing  have  led  many 
students  of  the  situation  to  suggest  that  we  should  let 
bygones  be  bygones,  and  accept  the  present  price  and  ex- 
change level  as  a  permanent  fact.  That  is  to  say,  they 
would  stabilize  the  value  of  the  mark,  franc,  etc.,  at 
approximately  their  present  values  and  not  attempt  to  go 
back  to  the  pre-war  gold  parities.^  The  paper  mark  is  now 
worth  about  one-twentieth  of  the  gold  mark — equivalent  in 
American  terminology  to  about  5  cents  on  the  dollar;  the 
franc  is  now  worth  about  two-fifths  of  its  normal  value. 
Now  to  stabilize  the  currency  at  present  values  would  require 
a  rigid  limitation  of  its  quantity — a  prevention  of  any 
further  inflation. 

Right  here  lies  a  practical  impossibility — in  most  coun- 
tries— of  accomplishing  the  end  in  view.  It  is  idle  to  talk  of 
restricting  further  issues  of  paper  currency  so  long  as 
government  budgets  remain  unbalanced.  When  taxes 
suffice  only  to  meet  a  small  percentage  of  government  ex- 
penditures, the  floating  of  government  bonds  soon  becomes 
impossible  and  the  issue  of  more  paper  money  becomes  the 


*  It  is  often  argued,  however,  that  some  countries  should  first  affect 
a  substantial  deflation. 


83  THE  SITUATION  AS  IT  REALLY  IS 

only  means  of  acquiring  government  funds.  We  do  not 
need  to  go  back  to  early  European  experiences,  or  even  to 
American  colonial  history,  to  find  striking  illustrations  of 
the  difficulties  in  controlling  the  supply  of  paper  money  when 
once  a  nation  is  well  advanced  on  the  highroad  of  inflation. 
They  may  be  drawn  from  the  recent  history  of  eastern 
Europe.  ^ 

The  nations  of  central  and  eastern  Europe  are  thus  faced 
with  a  three-horned  financial  dilemma.  To  attempt  a  return 
to  pre-war  values  and  standards  is  fraught  with  the  gravest 
industrial  and  social  consequences,  not  to  mention  political 
results.  Stabilization  at  existing  levels  is  a  practial  impos- 
sibility, unless  government  budgets  are  first  balanced,  and 
government  budgets  cannot  be  balanced.  Further  inflation, 
the  third  horn  of  the  dilemma,  only  leads  to  ultimate  mone- 
tary collapse. 

Continued  Inflation  Likely 

What,  then,  is  the  probable  outcome  for  Germany? 
Which  of  these  equally  disastrous  roads  will  she  seek  to 
travel  ?  All  the  evidence  points  towards  the  third — ^the  path- 
way of  continuous  inflation.  Business  men  are  inclined  to 
accept  this  course  as  the  lesser  of  many  evils.  For,  until  the 
end  comes — and  most  of  them  do  not  see  the  end — it  means 
rising  prices  and  good  profits.  It  is,  moreover,  a  stimulant  to 
export  trade;  and  Germany  must  increase  her  exports  if  she 
is  to  pay  reparations.  Some  of  the  industrialists  of  France 
are  also  reconciled  to  this  view  of  inflation. 

That  there  is  no  present  thought  in  German  govern- 
mental circles  of  arresting  further  inflation  is  evident  from 
a  recent  legislative  enactment.  In  April,  1921,  it  was 
provided  that  the  33  per  cent  reserve  requirement  against 


•  See  further  discussion  of  this  problem  in  Chapter  VIII. 


THE  GERMAN  MONETARY  COLLAPSE  83 

bank  notes  should  no  longer  be  required.*  It  is  accordingly 
now  legal  to  expand  the  note  issues  indefinitely — to  the  point 
of  worthlessness.  '^ 

The  altogether  probable  drift  in  Germany  will  therefore 
be  toward  further  inflation,  rather  than  toward  either  defla- 
tion or  stabilization.  As  has  been  the  case  in  Austria  and 
Russia,  we  may  expect  German  currency  to  expand  from 
80  ^  to  90  to  100  to  200  billions,  and  the  value  of  the  mark 
to  decline  from  one  cent,  to  a  half  cent — and  ultimately  to 
zero.  No  nation — it  should  be  repeated — has  ever  been  able 
to  retrace  its  steps  after  its  monetary  system  has  once 
approached  a  condition  comparable  to  that  of  Germany 
today.  Repeatedly  in  history  depreciation  has  continued 
gradually  to  utter  worthlessness.  The  end  usually  comes 
when  those  having  food  or  other  necessities  refuse  longer 
to  part  with  them  for  paper  currency  at  any  price. 

Incidentally,  paper  currency  in  Austria  is  still  not  quite 
worthless.  For  example,  a  beer  manufacturer  uses  paper 
crowns  (kronen)  as  labels,  existing  kronen  being  cheaper 
than  paper  for  the  purpose;  he  thus  advertises  "kronen" 
beer.  This  will  prove  a  short-lived  opportunity,  however, 
since  it  now  costs  about  five  crowns  to  manufacture  a  one- 
crown  piece. 

We  have  been  saying  "depreciation  to  zero"  and  "utter 
worthlessness."      Perhaps    it  will   not    go    quite   to    zero. 


'The  reserve  during  the  war  was  composed  of  gold  and 
darlehnkassenscheine.  The  darlehnkassenscheine  are  the  irredeem- 
able promises  to  pay  of  certain  German  loan  companies.  Before  the 
war  the  law  required  the  Reichsbank  to  hold  a  gold  reserve  of  out- 
standing notes  of  at  least  33  per  cent,  but  it  was  found  expedient 
early  in  the  war  to  modify  this  position  and  to  permit  the  darlehnkaS' 
senscheine  to  constitute  lawful  reserve  money. 

'  A  bill  was  also  recently  introduced  in  France  providing  that  the 
present  limitation  of  43  billions  of  note  issues  by  the  Bank  of  France 
be  raised  to  150  billions.  We  are  informed  that  the  measure  has  con- 
siderable backing. 

*  Within  two  months  after  writing  the  above  the  total  note  issues 
had  increased  to  over  80  billions. 


84  THE  SITUATION  AS  IT  REALLY  IS 

Before  the  point  of  utter  worthlessness  is  reached  the  govern- 
ment may  undertake  some  redemption  scheme,  whereby 
perhaps  loo  marks  in  paper  would  be  redeemed  for  one 
mark  in  gold.  The  effect  would  nevertheless  be  substanti- 
ally the  same. 

Effects  of  Repudiation 

There  is  little  likelihood  of  outright  repudiation  of  the 
mass  of  either  German  paper  money  or  government  bonds. 
Repudiation  requires  political  courage;  and  courage  is 
seldom  an  attribute  of  governments  in  financial  distress.  It 
is  less  difficult,  and  less  painful,  no  doubt,  to  allow  economic 
laws  to  accomplish  in  due  season  the  same  end  that  would  be 
produced  by  political  edicts. 

What  will  happen  to  modern  German  industrial  life  if 
German  currency  goes  the  way  of  that  of  Austria  and 
Russia?  If  the  currency  becomes  worthless  the  government 
bonds  issued  in  exchange  for  paper  money  must  share  a  simi- 
lar fate.  What  would  be  the  economic  result  if  a  hundred 
billions  of  bonds  and  a  hundred  billions,  or  so,  of  currency 
should  become  utterly  worthless  ?  Would  this  mean  starva- 
tion for  millions  of  Germans,  and  political  disintegration  and 
bolshevism  for  the  rest?  No  categorical  answer  can  in  the 
nature  of  things  be  given  to  such  questions.  That  the  in- 
dustrial consequences  of  such  an  economic  shock  would  be 
of  unparalleled  severity  is  not,  however,  to  be  questioned. 

In  one  way  this  virtual  repudiation  of  government  bond 
and  bank  note  obligation  may  be  said  to  amount  to  little. 
For  while  the  people  would  no  longer  receive  interest,  it 
would  also  be  unnecessary  for  them  to  pay  taxes.  What 
they  would  lose — in  interest — with  their  right  hand,  they 
would  save — in  taxes — with  their  left.  But  unfortunately, 
the  matter  is  not  so  simple  as  that.  As  individuals  we  seldom 
pay  taxes  in  precise  proportion  to  the  interest  received  on 


THE  GERMAN  MONETARY  COLLAPSE  85 

government  obligations;  some  pay  more,  some  less,  and 
some  neither  pay  taxes  nor  receive  interest.  Accordingly, 
repudiation  involves  wholesale  injustice  to  citizens  and 
would  result  in  a  thorough-going  redistribution  of  wealth, 
with  accompanying  widespread  social  disaffection.  It  is, 
therefore,  the  part  of  wiser  statecraft  to  allow  ultimate 
repudiation  to  come  through  the  indirect  process  of  inflation 
to  the  point  of  worthlessness. 

Some  idea  of  the  economic  consequences  of  this  ultimate 
debacle  may  be  gained  if  one  considers  that  practically  all  of 
the  collateral  that  is  back  of  bank  loans  would  be  worthless; 
that  the  assets  of  savings  banks  and  insurance  companies — 
representing  the  savings  of  German  citizens — would  be 
wiped  out;  that  the  investments  of  the  reserve  and  other 
funds  of  corporations  would  be  destroyed;  and  that  all 
private  financial  obligations  of  whatever  sort  would  be 
automatically  obsolete.  The  entire  financial  structure  would 
collapse. 

Development  of  New  Credit  Structure 

Land,  factories,  equipment,  railways,  etc.,  would,  how- 
ever, remain.  And  since  these  constitute  the  primary 
foundations  of  wealth  production,  it  is  not  to  be  supposed 
that  a  financial  cataclysm  would  result  in  a  complete  cessa- 
tion of  economic  activity.  Nevertheless,  all  of  modern 
economic  life  is  organized  and  controlled  through  the 
financial  machinery.  Business  is  conducted  in  the  midst  of 
a  complex  system  of  established  prices  and  values.  A  col- 
lapse of  the  entire  financial  mechanism  would,  therefore, 
result  for  a  time  at  least,  in  nothing  less  than  economic 
chaos. 

Whether  such  an  interregnum  could  be  compassed  with- 
out political  and  social  revolution  of  the  extreme  variety  is 
very  doubtful.  Mention  has  already  been  made  of  the  redis- 


86  THE  SITUATION  AS  IT  REALLY  IS 

tribution  of  wealth,  and  of  the  social  disaffection  that  would 
result  from  government  repudiation  of  bonds  and  paper 
currency.  Indirect  repudiation  through  the  inflationary 
process  might  permit  a  particular  government  for  the 
moment  to  escape  responsibility,  but  in  the  end  some  govern- 
ment would  be  held  accountable. 

However  disastrous  to  large  masses  of  the  population 
the  first  shock  of  the  financial  cataclysm  would  be,  the 
nation  would  undoubtedly  survive;  and  in  spite  of  political 
upheavals,  some  day,  no  doubt,  a  new  credit  system  based 
on  the  existing  gold  stock  of  the  Reichsbank  would  be  reared. 
Germany  might  eventually  get  started  again  on  a  sound 
money  basis,  that  is  to  say,  with  new  issues  of  paper 
money,  redeemable  in,  and  therefore  as  good  as,  gold.  ®  On 
the  basis  of  this  new  monetary  system  would  gradually  be 
developed  a  new  credit  structure,  a  new  series  of  financial 
relationships,  a  new  economic  system.  It  should  be  under- 
stood, however,  that,  as  in  the  case  of  ordinary  bankruptcy, 
the  past  would  remain  the  past — old  values  and  claims  would 
not  be  resurrected,  not  even  the  claims  of  foreigners  to 
German  paper  marks,  purchased  in  simple  faith  that 
Germany  must  and  will  come  back.  After  bankruptcy 
present  German  obligations  would  be  dead. 

Thus  stands  the  European  monetary  and  banking  situa- 
tion at  the  present  time.  There  is  little  hope  that  any  of  the 
nations  east  of  the  Rhine  can  return  to  sound  money,  save 
by  the  disastrous  rout  of  financial  bankruptcy.  West  of  the 
Rhine,  the  continental  situation,  if  less  desperate,  is  still 
admittedly  extremely  difficult.    The  best  that  may  reasonably 


•It  might  still  transpire,  however,  that  instead  of  issuing  new 
currency  that  would  be  redeemable  in  gold,  "new  tenor"  irredeemable 
notes  would  be  issued  as  was  the  case  in  American  colonial  days. 
Such  a  procedure  would  merely  mean  a  repetition  of  the  process  of 
inflation  to  utter  worthlessness.  New  tenor,  however,  seldom  remains 
good  for  so  long  a  period  as  the  old  or  original  tenor. 


THE  GERMAN  MONETARY  COLLAPSE  87 

be  expected  there  is  some  effort  toward  stabilization  at  exist- 
ing levels  of  monetary  depreciation;  but  in  view  of  the 
popular  unwillingness  to  be  taxed  sufficiently  to  balance 
budgets  and  in  view  of  the  control  that  the  masses  possess 
over  the  fiscal  policies  of  governments,  there  is  little  hope  in 
this  direction.  In  England,  on  the  other  hand,  there  is 
little  cause  for  anxiety — provided  only  some  measure  of 
industrial  peace  and  economic  stability  can  shortly  be 
attained. 


CHAPTER  VIII 

CONCLUSIONS  AS  TO  PRESENT  EUROPEAN 
CONDITIONS 

Formulating  a  Conclusion 

We  have  completed  the  discussion  of  the  several  meas- 
ures of  European  economic  conditions — the  foreign  ex- 
change, foreign  trade,  national  debts,  and  national  budgets, 
and  the  reserves  of  banking  systems.  It  remains  to  draw 
together  the  different  threads  of  the  analysis  and  to  formu- 
late some  general  conclusion  about  the  situation  as  a  w^hole. 

Can  it  be  said  that  conditions  are  on  the  whole  better,  or 
are  they  worse  than  they  were  a  year  ago?  The  answer  is 
not  altogether  simple.  If,  for  example,  one  regards  the  con- 
dition of  bank  reserves  and  the  degree  of  monetary  infla- 
tion as  the  truest  measure  of  fundamental  economic  condi- 
tions, he  will  doubtless  conclude  that  the  situation  is  now 
measurably  improved  so  far  as  western  Europe  is  concerned. 
Many  people  have  based  their  conclusion  that  conditions  are 
very  much  better  now  than  they  were  twelve  months  ago, 
mainly  on  the  improvement  in  bank  reserves  that  has  oc- 
curred. But,  on  the  other  hand,  if  one  finds  in  the  status  of 
national  budgets  the  clearest  picture  of  economic  conditions, 
he  will  doubtless  conclude  that  the  situation  this  year  is 
appreciably  worse  than  at  any  time  hitherto.  The  meaning 
of  the  data  presented  in  the  preceding  discussions  is  therefore 
still  somewhat  confused.  Further  analysis  is  necessary 
before  a  final  judgment  can  be  reached. 

The  significance  of  the  data  on  national  budgets,  mone- 
tary inflation,  foreign  trade,  and  the  foreign  exchanges,  may 
best  be  understood  by  considering  the  post-war  era  as  one 

88 


CONCLUSIONS  AS  TO  PRESENT  EUROPEAN  CONDITIONS  89 

composed  of  two  distinct  periods:  (i)  beginning  in  the 
spring  of  191 9  and  continuing  until  the  summer  of  1920, 
there  was  a  business  boom  that  influenced  the  situation  in  cer- 
tain definite  ways;  (2)  beginning  in  the  summer  of  1920  and 
continuing  without  abatement  to  the  present,  we  have  been 
in  the  midst  of  a  period  of  depression,  which  has  produced 
results  of  a  very  different  nature.  It  will  serve  to  clarify 
the  situation  if  we  note  the  precise  effects  of  each  of  these 
periods  upon  the  condition  of  national  budgets,  monetary  in- 
flation, exchanges,  and  foreign  trade.  The  statements  which 
follow  are  based  upon  data  assembled  in  preceding  pages. 

The  Boom  Period  and  Succeeding  Depression 

The  boom  period  of  1919-1920  was  accompanied  by  a 
great  inflation  of  the  currency  and  by  rapidly  mounting 
prices.  During  this  period  many  students  of  economic  con- 
ditions pointed  out  that  the  ultimate  results  of  this  process 
would  prove  disastrous  and  that  the  foundations  of  real 
prosperity  were  being  undermined.  From  the  monetary 
point  of  view  the  boom  period  was  clearly  unfortunate ;  the 
situation  appeared  to  be  growing  rapidly  worse.  But  during 
the  depression  of  1 920-1 921  there  has  been  a  substantial 
deflation  of  the  currency  in  the  United  States  and  Great 
Britain,  and  at  least  a  cessation  of  inflation  in  the  conti- 
nental countries  of  western  Europe.  From  the  monetary 
viewpoint  the  period  of  depression  has  therefore  been  bene- 
ficial; the  situation  appears  to  be  steadily  improving.  But 
this  is  not  true — it  must  be  emphasized — as  regards  central 
and  eastern  Europe.  And  even  in  western  Europe,  only 
one  form  of  inflation  has  ceased — that  resulting  from  com- 
mercial or  business  borrowing.  Government  borrowings  are 
as  great,  or  greater,  than  ever. 

Can  we  conclude  from  this — as  many  have  concluded — 
that  commercial  deflation  is  indicative  of  fundamental  im- 


90  THE  SITUATION  AS  IT  REALLY  IS 

provement  in  European  economic  conditions  ?  The  trend  of 
trade  and  production  will  throw  some  light  upon  the  issue 
involved.  During  the  boom  period  of  1919  and  1920, 
foreign  trade  and  the  volume  of  production  expanded — in 
physical  quantity  as  well  as  in  values.  It  was  during  this 
period,  it  will  be  recalled,  that  the  commercial  press  and  the 
financial  community  alike  were  proclaiming  to  the  world  in 
the  most  extravagant  language  the  marvelous  rapidity  with 
which  Europe  was  coming  back.  England  could  boast  of  her 
rapidly  increasing  output  and  expanding  foreign  commerce ; 
France  could  congratulate  herself  over  the  phenomenal  prog- 
ress that  had  been  made  in  restoring  her  devastated  areas; 
and  plucky  Belgium  could  point  with  honest  pride  to  her 
unparalleled  industrial  and  commercial  achievements. 

There  were  flies  in  the  ointment,  it  is  true,  even  aside 
from  the  perils  of  inflation.  Labor  and  management  were 
inefficient.  Industrial  warfare  was  a  perpetual  menace. 
Extravagant  consumption  and  inordinate  waste  were  uni- 
versal phenomena.  Basic  industries,  such  as  transportation, 
public  utilities,  and  housing,  were  neglected.  And  the  rapidly 
mounting  prices  were  responsible  for  much  of  the  social  and 
political  unrest  which  characterized  the  entire  period.  But 
wealth  production  in  Europe  nevertheless  increased.  The 
figures  of  expanding  foreign  trade  show  it,  as  do  also  the 
statistics  of  domestic  production  in  the  several  countries. 

But  beginning  with  the  deflation  period  of  1 920-1 921, 
Europe  can  boast  only  of  improving  banking  conditions ;  and 
not  all  countries,  as  we  have  seen,  can  even  do  this.  Pro- 
duction— save  in  agriculture — is  steadily  declining,  unem- 
ployment is  becoming  a  world  menace,  and  foreign  and 
domestic  trade  alike  are  languishing.  The  price  of  the  boom 
period  of  1919-1920  was  inflation;  the  price  of  the  deflation 
and  depression  period  of  1 920-1 921  is,  thus  far  at  least, 
reduced  production  and  lowered  standards  of  living. 


CONCLUSIONS  AS  TO  PRESENT  EUROPEAN  CONDITIONS  QI 

Foreign  Exchange  as  an  Index 

Viewed  from  the  angle  of  the  foreign  exchanges,  how- 
ever, we  do  not  find  such  distinct  differences  in  the  two 
periods  under  consideration.  With  one  exception,  foreign 
exchange  rates  are,  as  we  have  seen,  lower  at  this  period  of 
1921  than  they  were  a  year  ago.  But  the  period  of  business 
depression  has  not  resulted  in  a  sharp  decline  of  foreign 
exchange  quotations,  for  a  variety  of  reasons.  So  far  as  the 
bills  of  exchange  which  arise  out  of  actual  trade  operations 
are  concerned,  the  depression  cannot  be  said  to  have  in- 
creased the  disproportion  between  supply  and  demand. 
Indeed,  in  the  case  of  France,  as  we  have  seen,  the  collapse 
of  American  exports  to  France  has  served  materially  to 
reduce  the  supply  of  bills  and  has  thus  tended  to  raise  French 
exchange  rates. 

A  similar  influence  has  been  in  evidence  in  all  Europe. 
The  large  exports  of  gold  to  the  United  States  in  recent 
months,  while  bad,  very  bad,  from  the  point  of  view  of 
long-run  international  financial  readjustment,  has  neverthe- 
less temporarily  helped  to  stiffen  exchange  rates.  At  the 
same  time  the  large  American  tourist  travel  abroad  has 
tended  to  the  same  end  through  increasing  the  demand  for 
foreign  money.  These  factors,  together  with  the  sentimental 
effects  of  the  reparations  settlement  upon  Allied  finances, 
explain  why  French  exchange  is  slightly  higher  than  a  year 
ago  and  why  other  Allied  exchanges  have  not  fallen  more 
than  they  have.  On  the  whole  we  must  conclude  that  the 
movement  of  exchange  rates  during  the  past  year  throws 
very  little  light  upon  fundamental  conditions  abroad. 

Burden  of  National  Debt 

The  condition  of  national  budgets  is  also  interestingly 
related  to  the  two  different  periods  in  question.  During 
the  boom  year,  while  government  expenditures  increased  in 


92  THE  SITUATION  AS  IT  REALLY  IS 

most  countries,  the  inordinate  profits  of  business  made  it 
possible  also  to  increase  the  revenues  from  taxation.  Al- 
though the  situation  was  anything  but  satisfactory,  the 
view  was  widely  held  in  the  early  months  of  1920  that  if 
government  expenses  were  restricted  through  the  institution 
of  rigid  economy  and  if  taxes  were  courageously  increased, 
European  governmental  finances  would  soon  be  on  the  high- 
road to  recovery.  As  a  matter  of  fact,  however,  the 
result  of  depression  in  every  country  has  been  to  reduce 
enormously  the  profits  of  business,  and  in  consequence,  to 
reduce  the  government  receipts  from  existing  taxes.  On  the 
other  hand,  the  depression  has  tended  to  increase  expendi- 
tures through  enlarging  the  requirements  for  unemployment 
insurance. 

It  appears  to  be  a  practical  impossibility  for  any  nation 
greatly  to  reduce  expenditures  this  year — and  this  will  re^ 
main  true  so  long  as  the  depression  lasts.  Therefore, 
national  budgets  in  Europe  are  likely  to  go  from  bad  to 
worse.  The  burden  of  national  debt  will  be  rapidly  aug- 
mented; that  most  pernicious  type  of  inflation,  namely,  the 
kind  that  results  from  government  or  bank  issues  of  paper 
money  for  non-productive  purposes,  will  be  steadily  in- 
creased, and  in  consequence  the  whole  economic  organization 
will  progressively  deteriorate. 

The  conclusion,  therefore,  seems  definitely  to  be  that,  all 
things  considered,  the  European  economic  situation  is  today 
worse — substantially  worse — than  a  year  ago.  The  basic 
requirement  is  always  increased  production ;  wealth  that  has 
not  been  produced  cannot  be  consumed.  Reduced  wealth 
production  means  inevitably  reduced  standards  of  living; 
and  reduced  standards  of  living  mean  social  deterioration. 

The  improvement  in  banking  conditions — in  some 
countries — cannot  be  said  to  weigh  heavily  against  the  fac- 
tors of  deterioration  which  we  have  been  considering.     In 


CONCLUSIONS  AS  TO  PRESENT  EUROPEAN  CONDITIONS  93 

this  connection  it  is  of  interest  to  observe  that  the  two 
countries  of  Europe  that  now  boast  of  the  least  disturbed 
trade  conditions,  namely,  Italy  and  Germany,  are  the  nations 
in  which  commercial  inflation  has  been  least  checked;  while 
the  nations  that  are  most  distressed  are  the  ones  in  which 
deflation  has  been  the  most  pronounced. 

Let  there  be  no  misunderstanding  in  this  connection.  It 
is  not  for  a  moment  being  contended  that  the  inflation  of 
last  year  was  desirable  or  that  it  should  not  have  been 
checked.  For  the  boom  of  191 9- 1920  was  not  laying  the 
foundation  for  continued  economic  prosperity.  The  in- 
creased production  was  too  largely  in  non-essential  or  rela- 
tively unimportant  lines  of  enterprise.  Fundamental 
industries,  as  we  have  seen,  were  being  neglected.  Moreover, 
continuation  of  the  process  of  inflation  could  ultimately  lead 
only  to  financial  disaster.  What  is  contended  for  here  is 
merely  that  deflation  has  not  yet  brought  any  tangible 
measure  of  economic  recovery  to  stricken  Europe. 

Intangible  Results 

But  what  of  the  intangible  results?  Is  not  the  period 
of  deflation  a  blessing  in  disguise?  Are  we  not  thereby 
gradually  proceeding  toward  a  condition  from  which  a 
genuine  and  constructive  economic  revival  may  be  started? 
Did  the  situation  not  have  to  become  worse  than  it  was  be- 
fore it  could  become  better  than  it  is?  In  fine,  are  we  not 
now  rapidly  passing  through  the  period  of  deflation  and  are 
not  brighter  skies  immediately  ahead  ? 

It  is  undeniable  that  deflation  was  a  necessary  prelude 
to  better  days;  and  it  is  equally  undeniable  that  deflation 
could  not  be  accomplished  without  an  interregnum  of  busi- 
ness depression,  more  or  less  severe.  There  are  those  who 
believe  that  it  has  been  much  more  severe  than  is  necessary, 
that  it  might  have  been  controlled  and  made  at  once  more 


94  THE  SITUATION  AS  IT  REALLY  IS 

gradual  and  less  disturbing  to  business  operations.  Others 
doubt  the  possibility  of  controlling  world-wide  deflation  any 
better  than  it  has  been  controlled  on  this  occasion.  But  be 
this  as  it  may,  it  is  agreed  that  some  measure  of  business  de- 
pression was  inevitable  before  prices  and  finances  could  be 
readjusted  to  a  basis  from  which  prosperity  could  once  again 
be  started  on  firmer  foundations. 

If,  therefore,  there  was  assurance  that  the  depression 
would  now  soon  be  over,  it  might  indeed  be  concluded  that 
the  situation  is  now  very  much  better  than  it  was  twelve 
months  ago.  But  is  there  any  sound  reason  for  believing 
that  we  have  reached  the  bottom  of  depression,  and  that 
having  reached  the  bottom  we  shall  shortly  begin  a  new 
ascent  to  business  prosperity?  Of  such  paramount  import- 
ance is  this  issue  to  any  trustworthy  conclusion  as  to  the 
economic  condition  of  Europe  today,  that  it  requires  more 
than  a  passing  comment ;  we  must,  indeed,  devote  an  entire 
chapter,  the  one  following,  to  the  consideration  of  this 
subject. 

Subsidence  of  Industrial  Unrest 

It  is  often  argued  that  the  social  neurasthenia  of  the 
early  post-Armistice  period  has  now  passed  away  and  that 
neither  economic  nor  political  unrest  any  longer  constitutes 
a  serious  menace  to  European  recovery.  It  is  undoubtedly 
true  that  in  many  countries  labor  has  been  placed  upon  the 
defensive  by  the  events  of  the  past  year;  and  it  is  also  true 
that  the  chances  of  political  upheaval  are  at  the  moment 
decidedly  less  than  they  were  last  year  or  the  year  before. 
One  cannot  for  a  moment  seek  to  underestimate  the  import- 
ance of  the  change  in  popular  psychology  that  has  occurred. 
Labor  is  more  inclined — speaking  generally — to  work  hard 
for  its  daily  sustenance  than  last  year;  and  less  inclined  to 
industrial  turmoil.    So  far  so  good ;  but  the  good  would  be 


CONCLUSIONS  AS  TO  PRESENT  EUROPEAN  CONDITIONS  95 

much  better  if  so  many  millions  were  not  now  denied  the 
opportunity  to  work. 

The  fact  must  not  be  overlooked  that  in  central  and 
eastern  Europe,  without  considering  Russia,  industrial  un- 
rest has  been  held  in  check  only  by  the  process  of  granting 
all  demands  for  wage  advances.  In  lesser  degree  this  has 
also  been  true  in  western  Europe.  Nowhere — except  in 
England — has  any  real  eflFort  thus  far  been  made  to  shoulder 
the  real  burdens  of  war  costs.  Industrial  and  political  un- 
rest is  only  in  abeyance.  It  is  necessary,  however,  to  let  the 
issue  rest  for  the  moment  at  this  point.  We  shall  return  to 
it  after  considering  the  probable  duration  of  the  business 
depression. 

Agricultural  Conditions 

But,  it  may  be  asked,  has  not  agriculture  shown  substan- 
tial improvement?  And,  if  it  be  true  that  the  basic  industry 
of  all  is  making  steady  progress,  does  it  not  follow  that 
fundamental  economic  conditions  in  Europe  are  now  on  the 
mend  ? 

It  is  true  that  another  improvement  in  European  condi- 
tions is  found  in  agriculture.  There  is  no  question  but  that 
throughout  Europe  food  production  increased  in  1920  as 
compared  with  191 9,  while  in  some  regions  there  has  been 
further  improvement  in  1921.  According  to  a  member  of 
the  Reparations  Commission,  in  the  new  countries  of  eastern 
Europe  agricultural  conditions  were  materially  better  in  the 
spring  of  192 1  than  the  year  before.  The  Hoover  Relief 
Organization  has  found  similar  improvement. 

Another  communication  from  the  European  representa- 
tive of  the  Rockefeller  Foundation  indicates  that  health 
conditions  are,  in  consequence,  also  materially  improved. 
For  the  first  time  since  the  war  the  birth  rate  this  year 
exceeds  the  death  rate. 


96  THE  SITUATION  AS  IT  REALLY  IS 

It  was  to  be  expected,  of  course,  that  agriculture  should 
be  the  first  industry  to  improve.  For  it  is  free  from  the 
labor  and  other  troubles  which  beset  the  industries  of  urban 
communities,  and  it  is  less  definitely  involved  in  the  complex 
web  of  financial  relations  that  make  up  the  modern  monetary 
system.  And  most  important  of  all,  it  is  little  affected  by 
industrial  depression — that  is,  so  far  as  volume  of  output  is 
concerned.  Agricultural  production  goes  on  regardless  of 
the  business  cycle. 

French  Crops 

But,  on  the  other  hand,  agriculture  is  peculiarly  affected 
by  weather  conditions.  The  relatively  good  showing  of  the 
year  1920  is  in  no  small  degree  attributable  to  the  generally 
favorable  weather  conditions  that  prevailed  in  Europe. 
This  year,  on  the  other  hand,  large  sections  of  Europe  have 
suffered  from  one  of  the  worst  droughts  ever  known.  As 
everyone  knows,  it  has  brought  starvation  to  millions  of  peo- 
ple in  the  Volga  valley;  and  it  has  greatly  reduced  the 
agricultural  output  in  all  of  western  Europe.  The  following 
indexes  of  crop  conditions  in  France  made  public  on  July  5, 
1 92 1,  by  the  Department  of  Agriculture  are  significant.  The 
figures  are  percentages  of  100,  which  means  "very  good."  * 

June  I,  June  i, 

1930  1931 

Meadows  76  64 

Sugar  beets 77  71 

Corn   70  71 

Potatoes    74  69 

Vineyards   75  59 

Since  the  drought  continued  until  the  third  week  of  July 
and  was  then  broken  by  violent  storms  which  inflicted  much 

'Federal  Reserve  Bulletin,  August,  1921,  page  956. 


CONCLUSIONS  AS  TO  PRESENT  EUROPEAN  CONDITIONS  97 

damage  to  crops  in  southern  France,  it  is  altogether  probable 
that  the  final  yields  will  prove  even  more  disappointing  than 
the  June  i  estimates  indicate.  While  no  official  estimates 
are  given  for  wheat  and  the  other  cereals,  it  appears  from 
current  reports  that  the  damage  to  these  was  not  so  great. 

The  results  of  the  severe  droughts  this  year  may  be 
glimpsed  from  the  fact  that  the  Hoover  Relief  Organization 
has  this  summer  again  been  obliged  to  render  aid  in  the 
devastated  areas  of  northern  France. 

French  agriculture  may  be  taken  as  typical  of  the  best  in 
Europe.  Hence,  the  following  comparative  data  on  the 
yield  of  leading  crops  in  France  before  and  since  the  war  will 
prove  illuminating :  ^ 

(In  quintaux,  000  omitted) 


1913 

Wheat  86,919 

Rye    12,715 

Barley   10,438 

Oats   51,826 

Corn    5,431 

Potatoes   135,860           77,305         116,378                  86 

The  good  year,  1920,  showed  a  marked  improvement 
over  191 9;  but  on  the  average  food  production  was  still  only 
about  three-quarters  that  of  191 3.  This  year  it  will  be  even 
less.  Potatoes  made  the  best  showing  in  1920;  but  the  fig- 
ures in  this  case  include  the  production  of  Alsace-Lorraine, 

The  following  table  shows  the  number  of  farm  animals 
in  France  in  1919  and  1920  as  compared  with  1913:^ 


1920  crops 

as  com- 

pared with 

I9I9 

1920 

1913=100 

49,654 

64,482 

74 

7,299 

8,761 

69 

5,000 

8,357 

80 

24,536 

42,208 

81 

2,534 

3,878 

71 

'  Federal  Reserve  Bulletin,  August,  1921,  page  956. 
*Ibid. 


98  THE  SITUATION  AS  IT  REALLY  IS 

(ooo  omitted) 


1913 

Cows  and  beeves  14,788 

Horses    3,222 

Mules    188 

Asses    356 

Sheep    16,131 

Hogs    7,036 

In  final  conclusion  it  may  be  said  that  the  temporary 
alleviation  of  industrial  unrest  and  the  slight  improvement 
in  agriculture  that  has  occurred  do  not  weigh  heavily  in 
comparison  with  the  other  indexes  of  fundamental  conditions 
which  have  been  considered.  Foreign  exchange  and  foreign 
trade,  monetary  inflation  and  government  finances,  are  the 
controlling  factors  in  the  highly  complex  and  interdependent 
financial  organization  of  the  twentieth  century. 


1920  as  com< 

pared  with 

I9I9 

1930 

1913=100 

[2,374 

13,217 

89 

2,413 

2,635 

82 

167 

181 

96 

303 

298 

84 

8,991 

9,406 

58 

4,080 

4,942 

70 

CHAPTER  IX 

HOW  LONG  WILL  THE  DEPRESSION  ENDURE? 

Divergent  Views 

The  duration  of  the  business  depression  which  now 
holds  the  world  in  its  thrall  is  conceded  to  be  one  of  the 
most  vital  economic — and  political — issues  in  the  world  to- 
day. It  is  a  paramount  economic  issue  because  upon  busi- 
ness recovery  depends  the  material  well-being,  one  may 
almost  say  the  very  existence,  of  many  millions  of  people. 
It  is  a  paramount  political  issue  because  without  a  return  of 
prosperity  many  existing  European  governments  will  sooner 
or  later  succumb  under  the  financial  strain  to  which  they 
are  now  being  subjected.  In  view  of  the  enormous  signifi- 
cance of  the  problem,  a  thorough-going  analysis  of  the  fac- 
tors involved  in  the  present  industrial  and  financial  situation 
is  required. 

Men's  views  of  the  probable  duration  of  the  present 
depression  in  business  are  as  far  apart  as  the  poles.  Among 
those  who  count  themselves  shrewd  judges  of  economic 
conditions  there  is  the  greatest  diversity  of  opinion.  Some 
are  convinced  that  we  are  in  for  many  years  of  depression; 
others  hold  that  a  year  from  this  autumn  will  see  a  turn  for 
the  better ;  while  still  others  insist  that  a  substantial  improve- 
ment is  due  within  a  few  months.  It  will  serve  as  a  useful 
background  to  our  analysis  if  we  first  present  the  argu- 
ments advanced  by  those  who  hold  such  divergent  views  as 
to  the  probable  duration  of  the  existing  depression. 

Those  who  look  for  an  early  revival  of  business  base 
their  conclusions  on  a  variety  of  grounds.  Some  contend 
that  prosperity  will  return  the  moment  the  buyers'  strike  is 

99 


lOO  THE  SITUATION  AS  IT  REALLY  IS 

ended ;  let  purchasing  be  resumed  and  all  things  else  will  fol- 
low. Others  are  less  specific  and  merely  feel  that  all  will  be 
well  as  soon  as  the  world  as  a  whole  has  settled  down  to 
"normalcy."  Others  insist  that  it  is  mainly  a  question  of 
interest  rates;  when  money  again  becomes  cheap — not  long 
hence — loans  will  be  increased  and  business  activity  will 
revive.  Still  another  view  is  that  production  has  been 
reduced  much  more  than  consumption  and  that  exhausted 
stocks  of  goods  will  shortly  necessitate  a  resumption  of 
productive  activities.  Finally,  there  is  the  "ordinary  busi- 
ness cycle"  view  which  holds  that  the  history  of  past  trade 
cycles  indicates  that  the  duration  of  depression  is  normally 
short,  that  the  bottom  is  soon  reached,  and  that  the  process 
of  recovery  then  presently  begins. 

Buyers'  Strike  Theory 

One  finds,  by  reference  to  contemporary  literature,  that 
the  buyers'  strike  argument  is  heard  less  frequently  now 
than  it  was  a  year  ago.  It  is  beginning  to  be  realized  that  the 
failure  to  buy — whatever  may  have  been  the  case  in  the  early 
stages  of  the  depression — is  now  largely  due  to  a  lack  of 
buying  ability.  The  huge  volume  of  unemployment  and 
the  reduction  of  wages  and  profits  has  destroyed  purchasing 
power;  and  it  is  urged  that  it  cannot  be  restored  until  after 
active  business  has  been  resumed.  Credit  has  also  been 
undermined,  particularly  in  Europe.  Thus  many  insist  that 
the  United  States  must  resume  credit  extensions  to  Europe 
before  the  purchasing  of  American  raw  materials  can  be 
resumed.^  Following  this  development,  it  is  urged  that  the 
buying  power  thus  generated  among  the  producers  of  food- 
stuflFs  and  raw  materials  in  the  United  States  will  soon  pro- 
duce a  general  revival  of  domestic  prosperity  there.    Those 


'The  problems  involved  in  resuming  foreign  credit  extensions  are 
discussed  in  Chapter  XIX. 


HOW  LONG  WILL  THE  DEPRESSION  ENDURE?         lOI 

who  hold  this  view  are,  however,  not  hopeful  of  an  early 
revival;  they  are  looking  a  good  many  months  ahead,  for 
they  realize  the  difficulties  involved  in  resuming  credit  ex- 
tension to  Europe  under  present  conditions. 

Cheap  Money  Doctrine 

Those  who  insist  that  as  soon  as  "cheap  money"  is  at- 
tained business  men  will  again  seek  to  borrow  from  the 
banks,  loans  will  be  increased,  prices  will  rise,  and  pros- 
perity will  be  resumed,  argue,  one  must  say,  from  premises 
which  find  little,  if  any,  support  in  actual  business  life.  This 
point  of  view  requires  more  than  a  passing  word,  however, 
because,  strangely  enough,  it  is  tenaciously  held  by  many 
economists  of  the  present  day. 

There  is  an  old  argument  to  the  effect  that  when  any- 
thing is  cheap  the  demand  for  it  automatically  increases; 
and  it  would  seem  to  follow  that  when  money  is  cheap  the 
demand  for  it  will  also  increase,  with  the  results  suggested 
above.  So  certain  are  some  economists  that  the  whole  prob- 
lem of  depression  is  but  a  simple  question  of  interest  rates, 
that  they  attack  the  managers  of  the  central  banks  of  Eng- 
land and  the  United  States  for  not  summarily  reducing 
discount  rates  for  the  purpose  of  breaking  the  back  of  the 
depression.  But  one  may  learn  from  the  experience  of  busi- 
ness men  that  there  is  no  reason  whatever  why  a  business 
man  should  seek  to  borrow  money  at  4,  or  even  at  i  per  cent, 
if  he  cannot  find  an  opportunity  to  employ  it  at  a  profit. 
Moreover,  in  a  time  of  depression  the  security  for  loans  is 
scrutinized  by  bankers  with  more  than  ordinary  care  and 
they  will  not  grant  a  loan  for  commercial  purposes  at  all 
unless  they  "see  the  money  coming  back" — as  a  result  of 
profitable  business  operations. 

If  evidence  on  this  point  is  wanted,  it  is  to  be  found  in 
abundance  in  the  history  of  some  of  our  past  depressions, 


102  THE  SITUATION  AS  IT  REALLY  IS 

notably  in  the  early  nineties  and  in  the  late  seventies.  In 
the  latter  period  there  was  a  plethora  of  funds  and  "rock 
bottom"  interest  rates  in  the  United  States  almost  continu- 
ously from  the  autumn  of  1873  to  the  summer  of  1879. 
Bankers  complained  of  their  inability  to  loan  money;  and 
many  threatened  to  leave  the  business  because  it  had  ceased 
to  be  profitable.  Conditions  were  similar  in  other  countries. 
In  the  seventies  and  nineties  the  discount  rate  at  the  Bank 
of  England  fell  as  low  as  2  per  cent  without  stimulating  a 
revival  of  borrowing.  Instead  of  wishing  to  borrow,  many 
businesses  sometimes  find  it  impossible  in  a  time  of  depres- 
sion to  make  a  profitable  use  of  all  of  their  own  working 
capital ;  they  also  have  money  to  lend. 

In  the  face  of  these  facts,  which  he  who  runs  may  read, 
it  is  nothing  short  of  a  psychological  phenomenon  that  so 
many  students  of  finance  should  hold  to  the  myth  that  low 
interest  rates  alone  are  sufficient  to  produce  a  business  re- 
vival. The  truth  is  that  cheap  money  is  one  factor  con- 
ducive to  a  revival  of  business  activity;  but  it  is  only  one  of 
many  which  must  act  together  to  restore  the  confidence  that 
is  necessary  to  business  resumption. 

Exhausted  Stocks  Theory 

The  contention  that  production  has  decreased  more 
rapidly  than  consumption  and  that,  in  consequence,  increased 
production  will  shortly  be  required,  has  more  point  to  it. 
If  stocks  of  goods  are  being  rapidly  depleted  and  if  the 
volume  of  consumptive  demand  is  above  current  production, 
it  would  seem  to  follow  that  sooner  or  later  production  will 
have  to  be  increased. 

It  does  not  necessarily  follow,  however,  that  on  the 
present  occasion  an  early  return  of  prosperity  is,  for  this 
reason,  assured.  In  a  number  of  lines  accumulated  supplies 
appear  already  to  have  been  exhausted;  but  the  increased 


HOW  LONG  WILL  THE  DEPRESSION  ENDURE?        103 

output  that  resulted  from  this  depletion  was  not  great,  for 
the  reason  that  so  many  other  lines  of  business  were  still  "on 
the  way  down."  In  many  basic  industries,  moreover,  it  is 
notorious  that  the  supplies  of  goods  are  still  of  huge  propor- 
tion. With  16,000  hogsheads  of  tobacco  (two  years'  supply 
for  Great  Britain)  in  Liverpool  warehouses;  with  nearly 
three  years'  world  supply  of  wool  on  hand;  with  hides  almost 
unsalable  at  any  price;  and  with  large  supplies  of  sugar, 
copper,  cotton,  and  other  commodities  still  on  hand,  one  has 
to  have  even  more  than  the  natural  American  gift  of  opti- 
mism to  look  for  a  substantial  revival  of  production  in  the 
near  future  in  these  basic  lines. 

It  is  not  without  significance,  moreover,  that  there  are 
vast  stocks  of  war  supplies  which  governments  must  still 
liquidate.  It  is  understood  that  the  United  States  govern- 
ment alone  has  several  billion  dollars'  worth  of  supplies  still 
unsold — supplies  of  almost  every  conceivable  kind.  It  is 
understood,  also,  that  the  government  is  hesitating  to  sell 
them  at  this  time  through  fear  of  the  demoralizing  effects 
upon  the  markets  generally.  Granted  that  the  argument 
that  production  must  ultimately  be  increased  to  catch  up 
with  consumption  is  sound,  there  is  nevertheless  little 
ground  for  believing  that  the  time  has  yet  arrived.  More 
will  be  said  in  this  connection  presently. 

The  Question  of  Prices 

Closely  associated  with  the  argument  just  considered  is 
the  contention  that  after  prices  hit  bottom  in  any  line,  they 
must  soon  thereafter  begin  to  rise  again.  Accordingly,  even 
before  all  prices  get  to  the  bottom,  there  may  be  enough  that 
are  already  coming  back  to  make  the  net  situation  one  of 
improvement.  But  is  it  true  that  when  prices  reach  bottom 
in  any  line  they  necessarily  start  going  up  again,  and  that 
in  consequence  when  the  "price  bottom"  in  general  has  been 


I04  THE  SITUATION  AS  IT  REALLY  IS 

reached  there  will  be  an  early  recovery  of  business  in 
general  ? 

Whatever  may  have  been  the  case  in  some  periods  of 
minor  depression,  it  was  certainly  not  true  in  the  major 
depressions  of  the  early  nineties  and  the  late  seventies  that 
prices  rebounded  immediately  after  reaching  the  cellar.  In 
fact  they  remained  down — with  minor  fluctuations — for 
several  years;  they  even  descended  to  the  sub-cellar.  The 
events  of  these  depressions  should  also  prove  disquieting  to 
those  who  insist  that  production  will  necessarily  increase 
just  as  soon  as  stocks  are  depleted. 

While  on  this  argument,  it  may  be  well  to  ask  precisely 
what  is  bottom  in  the  present  price  situation  ?  Will  the  bot- 
tom be  reached  when  prices  are  only  50  per  cent  higher  than 
before  the  war,  or  will  the  index  number  go  down  to  125, 
or,  perchance,  will  it  go  all  the  way  back  to,  or  possibly  even 
below,  the  level  of  1913?  The  views  of  most  students  of 
price  movements  have  already  had  to  be  revised  several  times 
during  the  present  decline.  May  they  not  have  to  be  revised 
again?  It  is  significant  that  the  number  of  students  who 
believe  that  prices  may  conceivably  fall  to  the  pre-war  level 
— at  least  in  England  and  this  country — is  increasing. 

But,  it  may  be  asked,  how  is  such  a  decline  possible  in 
view  of  present  costs  of  production?  The  answer  is  that 
costs  fall  as  prices  decline.  There  is,  in  fact,  an  interaction 
of  forces;  a  decline  in  costs — for  any  reason — permits  a 
cutting  of  prices ;  and  a  cutting  of  prices  below  cost,  as  often 
occurs,  forces  a  driving  down  of  costs.  The  vicious  spiral 
that  characterized  the  period  of  rising  prices  has  been 
reversed ;  the  corkscrew  is  now  boring  downward. 

Further  Decline  Likely 

Notwithstanding  the  cessation  of  price  declines  in  Eng- 
land and  the  United  States  during  the  summer  of  1921,  there 


HOW  LONG  WILL  THE  DEPRESSION  ENDURE?        105 

is  little  reason  to  believe  that  the  decline  has  been  perma- 
nently halted.  The  depression  in  some  countries  is  just 
getting  under  way,  and  this  will  have  its  effects  in  the  inter- 
national markets  generally.  Germany  is  making  a  desperate 
effort  to  acquire  funds  for  making  reparations  payments,  by 
underselling  her  competitors  in  every  market.  Great  Britain 
is  making  a  tremendously  powerful  drive  for  a  reduction  of 
wages  in  all  lines,  to  the  end  that  she  may  regain  her  place 
in  world  markets — a  place  that  a  few  years  ago  she  had  been 
able  to  maintain  only  because  of  the  very  low  price  of  coal. 
Whatever  may  be  the  merits  of  the  effort,  success  is  at  last 
attending  British  efforts  to  liquidate  labor.  The  cumulative 
effects  of  the  recent  reductions  in  British  wages  upon  the 
money  costs  of  production  in  British  industry  generally  will 
not  be  fully  manifested  for  many  months. 

In  the  United  States,  also,  there  is  little  reason  to  believe 
that  the  end  of  the  descending  spiral  has  been  reached. 
The  process  of  wage-cutting,  for  example,  still  continues. 
Indictments  of  the  "criminals"  engaged  in  building  trade 
combines  are — according  to  reports — still  in  an  incipient 
stage;  and  coal  prices  have  not  as  yet  been  materially  re- 
duced. More  significant  still  is  the  powerful  drive  that  has 
recently  been  started  for  a  reduction  in  transportation  costs. 
It  may  take  a  long  time  to  accomplish  this  reduction;  but 
before  we  are  through  with  the  process  of  liquidation,  rail- 
road rates  will  be  materially  lower — following  which,  there 
is  practically  certain  to  be  another  wave  of  cost  and  price 
reductions  more  or  less  throughout  the  industrial  system. 

In  this  connection,  it  may  be  noted,  that  those  who  hold 
to  the  buyers'  strike  view  of  depression  can  find  little  reason 
for  immediate  optimism.  For,  so  long  as  there  is  a  hope  that 
the  forces  at  work  will  carry  prices  still  lower,  there  is  little 
incentive  to  resume  purchasing  just  yet.  The  buyer  is  no 
more  certain  to  regard  50  per  cent  above  pre-war  prices  as 


I06  THE  SITUATION  AS  IT  REALLY  IS 

bottom  than  lOO  per  cent  above.  He  is  more  likely  to  see 
the  bottom  as  actual  pre-war  prices.  In  so  far,  therefore,  as 
psychology  may  aflfect  the  situation,  its  influence  will  be  in 
the  direction  of  still  further  price  declines.  Little  stock  is  to 
be  taken  in  the  psychological  argument,  however;  the  his- 
tory of  past  business  cycles  reveals  that  changes  in  psychology 
follow  rather  than  precede  changes  in  fundamental  business 
conditions. 

Price  Maladjustment 

Altogether  too  much  emphasis  has  been  placed  upon  the 
average  of  prices,  as  revealed  in  the  various  index  numbers. 
The  important  matter  in  the  present  situation  is  not  that  the 
average  price  level  is  now  only  50  per  cent  higher  in  the 
United  States,  for  example,  than  it  was  in  191 3;  not  the 
average  of  all  prices,  but  the  variation  of  prices  as  between 
different  groups  of  commodities  is  the  significant  feature  in 
the  present  price  situation.  The  prices  of  agricultural  com- 
modities in  the  United  States,  taken  as  a  group,  as  shown  by 
the  United  States  Bureau  of  Labor  Statistics,  now  average 
about  13  per  cent  higher  than  the  191 3  figures.  It  should  be 
added  that  these  are  the  prices  in  the  primary  markets,  and 
not  at  the  farms,  where  prices  are  now  little,  if  any,  above 
actual  pre-war  levels.  On  the  other  hand,  the  prices  of 
household  furnishings  are  still  approximately  2^  times  the 
pre-war  prices,  and  the  prices  of  building  materials  are 
approximately  double  those  of  191 3.  A  number  of  other 
groups  of  commodities  are  still  well  in  excess  of  50  per  cent 
above  the  pre-war  level. 

Now  the  farming  communities  in  the  United  States  still 
comprise  over  one-third  of  the  total  population.  Accord- 
ingly, the  purchasing  power  of  the  farmers  is  of  fundamental 
importance  to  industrial  prosperity.  With  the  prices  of  the 
things  which  the  farmer  has  to  sell  roughly  at  pre-war  levels 


HOW  LONG  WILL  THE  DEPRESSION  ENDURE?        107 

and  the  prices  of  the  things  which  he  has  to  buy  still  roughly 
twice  the  pre-war  prices,  it  requires  no  great  mathematical 
ability  to  demonstrate  that  farm  purchasing  power  has  been 
tremendously  reduced  because  of  the  disproportionately 
heavy  fall  in  the  prices  of  agricultural  produce.  Before  the 
war  the  gradual  evolution  of  agriculture  and  industry  had 
resulted  in  a  normal  price  equilibrium,  which  passed  away 
when  widely  different  changes  took  place  in  prices. 

The  present  unbalanced  situation  will  remain  true  until 
one  or  the  other  of  two  things  happens :  Either  farm  prices 
must  rise  until  they  approach  an  equilibrium  with  the  prices 
of  other  things,  or  else  the  prices  of  other  things  must  fall 
until  they  approach  an  equilibrium  with  farm  prices.  There 
are  those  who  argue  that  the  easy  way  out  is  to  raise  farm 
prices  half-way  and  reduce  the  prices  of  other  things  half- 
way, thereby  effecting  an  equilibrium  at  a  level  of,  say,  50 
per  cent  above  the  pre-war  average.  Nothing,  however,  in 
the  working  of  economic  forces  can  be  found  to  justify  the 
belief  that  the  prices  of  agricultural  produce  can  auto- 
matically be  raised  with  a  view  to  reaching  the  desired 
equilibrium.  The  prices  of  agricultural  commodities  in  the 
United  States  and  elsewhere  will  be  governed  by  world-wide 
conditions  of  demand  and  supply,  and  there  is  nothing  in  the 
present  situation  to  warrant  any  confident  belief  that  the 
prices  of  agricultural  commodities  will  soon  rise  much  above 
their  present  levels.  If  such  proves  to  be  the  case — if 
agricultural  prices  remain  at  or  near  their  present  levels — 
the  resulting  low  purchasing  power  among  the  farmers  of 
the  world  will  in  the  end  drag  the  prices  of  the  other  groups 
of  commodities  down  close  to  the  same  level.  A  lagging 
demand  for  the  products  of  manufacturing  industry 
throughout  the  vast  agricultural  areas  of  the  country  will 
exert  a  persistent  pressure  for  a  continuance  of  the  process 
of  industrial  and  labor  liquidation. 


108  THE  SITUATION  AS  IT  REALLY  IS 

Price  Stabilization 

There  is  a  widespread  agitation  at  the  present  time,  both 
in  the  United  States  and  Europe,  in  favor  of  the  stabiHza- 
tion  of  prices  at  approximately  their  present  level.  It  is 
urged  that  further  deflation  is  highly  undesirable  because  of 
the  attending  industrial  consequences;  deflation,  it  is  con- 
tended, is  just  as  bad  as  inflation.  Neither  high  nor  low 
prices  matter;  all  that  matters  is  that  prices  should  cease  to 
fluctuate. 

The  whole  argument  for  price  stabilization,  however, 
rests  on  the  assumption  that  it  is  the  price  level  that  is  the 
significant  factor  in  the  present  price  situation.  The  argu- 
ment wholly  ignores  the  wide  variations  that  now  exist  in 
the  prices  of  different  groups  of  commodities.  No  attempt 
can  here  he  made  to  discuss  fully  the  issues  involved  in  the 
stabilization  program.  Two  or  three  questions  may,  how- 
ever, with  pertinence,  be  raised. 

If  possible,  would  it  be  desirable  to  stabilize  prices  at  a 
level  of  150,  when  such  action  would  involve  holding  the 
prices  of  farm  products  at  approximately  their  present  low 
levels  and  the  prices  of  household  furnishings,  building 
materials,  etc.,  at  approximately  their  present  high  levels? 
Is  it  possible,  if  agricultural  prices  remain  at  their  present 
levels,  to  maintain  the  prices  of  the  things  which  the  farmer 
has  to  buy  at  their  existing  levels  ?  Is  it  possible  to  have  the 
prosperity  which  "stabilizers"  hope  to  promote,  by  keeping 
agricultural  purchasing  power  permanently  depressed?  If 
not,  how,  concretely,  is  it  proposed  to  eliminate  automati- 
cally the  wide  price  divergencies  that  now  exist  ? 

The  Quantity  Theory  of  Money 

There  are  numerous  economists  of  standing  who  argue 
that  prices  cannot  be  expected  to  fall  any  lower  than  they 
now  are  because  of  the  vast  quantity  of  gold  and  paper 


HOW  LONG  WILL  THE  DEPRESSION  ENDURE?        109 

money  that  is  available  for  the  requirements  of  business. 
The  quantity  theory  of  money  impHes  that  the  level  of  prices 
is  controlled  by  the  quantity  of  gold  and  other  forms  of 
currency,  including  credit  or  deposit  currency.  If  this 
theory  is  sound,  the  question  naturally  arises  whether  it  is 
not  true  that  the  present  quantity  of  currency  is  easily  suffi- 
cient to  support  the  present  level  of  prices  throughout  the 
world. 

In  the  long  run,  there  is  undoubtedly  a  fairly  close  cor- 
relation between  price  movements  and  changes  in  the 
quantity  of  gold  and  other  forms  of  currency.  In  the  short 
run,  however — that  is  to  say,  in  the  downward  swing  of  the 
business  cycle — it  cannot  be  said  that  the  quantity  of  gold 
and  credit  currency  is  of  any  real  importance.  While  a 
shortage  of  currency  and  of  bank  reserves  may  limit  the 
extent  to  which  prices  may  rise  on  the  upward  swing  of  the 
cycle,  a  plethora  of  funds  does  not  limit  the  extent  to  which 
prices  may  fall  during  the  period  of  depression. 

It  may  be  recalled  in  this  connection  that  certain  strong 
adherents  of  the  quantity  theory  urged  a  year  or  so  ago 
that  prices  could  not  fall  at  all,  because  the  quantity  of 
currency  in  circulation  would  not  permit  it.  The  post-war 
price  level  was  necessarily  to  be  permanent.  After  the  index 
number  of  prices  in  the  United  States  had  fallen  from  the 
peak  of  272  to  225,  it  was  then  argued  by  many  that  prices 
could  not  well  go  below  200,  because  the  quantity  of  gold 
and  other  forms  of  currency  was  sufficient  easily  to  support 
a  price  level  double  that  of  191 3.  And  now  that  prices  have 
receded  to  an  average  of  150,  these  same  persons  are  still 
sure  that  the  supply  of  currency  is  the  controlling  factor, 
and  that  in  consequence  prices  cannot  well  go  much  lower. 

The  fact  is  that  the  downward  movement  of  prices  is 
governed  by  a  tangled  web  of  economic  forces,  in  which  the 
quantity  of  money  and  currency  plays  a  relatively  unim- 


no  THE  SITUATION  AS  IT  REALLY  IS 

portant  role.  The  quantity  of  currency  in  circulation  has 
decreased,  it  is  true,  but  only  after  the  fall  in  prices  and  the 
decrease  in  the  volume  of  business  activity.  Prices  actually 
fell  for  several  months  before  the  decline  in  currency  began. 
Currency  that  last  year  and  the  year  before  was  in  the  chan- 
nels of  circulation  is  now,  in  consequence  of  the  prolonged 
liquidation  that  has  occurred,  accumulated  in  the  vaults  of 
banking  institutions.  There  appears  to  be  no  reason  why, 
so  far  as  the  currency  supply  is  concerned,  the  price  level 
may  not  as  readily  decline  from  150  to  125  as  it  did  from 
200  to  150.  The  result  would  merely  be  a  still  further 
augmentation  of  bank  reserves. 

The  only  way  in  which  the  accumulation  of  bank 
reserves,  resulting  from  the  decline  in  prices  and  the  busi- 
ness depression,  may  conceivably  serve  to  check  further 
price  declines,  is  through  the  effects  of  a  plethora  of  funds 
upon  discount  rates  at  the  banks.  As  we  have  already  seen, 
however,  low  interest  rates  alone  cannot  check  the  forces  of 
liquidation  nor  bring  about  a  resumption  of  business 
activity. 

On  the  next  upward  swing  of  the  business  cycle  the  ex- 
istence of  very  large  bank  reserves,  and  the  great  powers  of 
credit  expansion  on  the  basis  thereof,  will  undoubtedly  per- 
mit prices  to  rise  again  for  some  time  and  to  a  very  con- 
siderable extent.  Thus  in  the  long  run — particularly  if  the 
nations  of  Europe  do  not  attempt  to  reduce  outstanding 
currency  in  the  effort  to  return  to  a  specie  basis — we  might 
have  a  price  level  very  much  higher  than  that  of  191 3.  For 
the  present,  however,  we  are  concerned  with  the  possibilities 
of  a  still  further  decline  in  prices  during  the  present  down- 
ward swing.  On  this  issue  our  conclusion  is  that  the  avail- 
able supplies  of  gold  and  other  forms  of  currency  will  not 
prevent  still  further  price  recessions.  The  extent  of  the  fall 
will  be  governed  by  other  factors. 


HOW  LONG  WILL  THE  DEPRESSION  ENDURE?        Ill 

The  "Ordinary  Business  Cycle"  Theory 

This  theory  of  the  "ordinary  business  cycle,"  the  advo- 
cates of  which  look  for  an  early  return  of  moderately  good 
business,  merits  careful  consideration.  A  study  of  business 
and  financial  data  over  a  period  of  years  reveals  a  very 
definite  cycle  movement.  Business  passes  successively 
through  stages  of  depression  to  prosperity,  to  financial  crisis 
and  back  to  depression,  whence  in  due  time  it  emerges  again 
and  enters  upon  a  new  round  of  prosperity,  etc.  This 
cyclical  movement  has,  of  course,  been  long  observed,  but 
until  lately  the  stage  of  depression  was  generally  regarded 
as  of  somewhat  uncertain  duration.  But  recent  elaborate 
statistical  correlation  of  financial  and  business  data  has  led 
certain  economists  to  conclude  that  depressions  are  normally 
of  fairly  uniform  duration. 

The  study  on  which  this  conclusion  was  based  covers  the 
years  from  1903  to  1914,  during  which  there  were  four 
periods  of  depression.  It  was  found  that  from  the  date  on 
which  interest  rates  ceased  advancing  on  the  upward  swing 
of  the  business  cycle,  it  was  always  from  six  to  ten  months, 
usually  nearer  the  latter,  before  the  bottom  of  the  depres- 
sion was  reached  and  a  turn  for  the  better  was  definitely 
discernible.  This  correlation  method,  it  should  be  under- 
stood, does  not  attempt  to  assign  causes ;  it  merely  ascertains 
the  facts.  The  significant  fact  is  that,  for  some  reason  or 
other — it  does  not  matter  what — a  business  depression  works 
its  own  cure  in  from  six  to  ten  months. 

The  theory  is,  nevertheless,  pretty  closely  associated  in 
the  minds  of  economists  with  the  low  interest  rate  theory 
already  discussed.  Since  interest  rates  ceased  to  advance  in 
the  summer  of  1920,  it  was  predicted  that  the  bottom  of  the 
depression  would  be  reached  in  the  spring,  say  April,  of 
1 92 1.  Events  have  already  shown  that  the  date  was  set  too 
early.     Indeed,  it  has  been  conclusively  demonstrated  that 


112  THE  SITUATION  AS  IT  REALLY  IS 

the  length  of  time  required  to  reach  bottom  under  present 
conditions  bears  no  relation  to  the  length  of  time  required 
under  conditions  which  prevailed  in  other  depressions.  It 
remains  to  be  seen  whether,  when  the  bottom  is  reached,  a 
new  ascent  will  immediately  be  begun. 

Untenable  Doctrine 

The  fundamental  difficulty  with  this  theory  as  applied 
to  the  present  situation  is,  in  brief,  that  the  data  on  which  it 
is  based  were  drawn  from  a  period  (1903- 19 14)  when 
world  economic  conditions  were  the  most  stable  in  history 
— a  period  relatively  free  from  destructive  wars,  one  during 
which  all  important  nations  were  on  a  well-established  gold 
money  basis,  with  the  international  exchanges  almost  every- 
where at  par,  and  the  whole  international  financial  and  trade 
mechanism  in  adjusted  equilibrium.  It  was  a  period  in 
which  public  finance  in  all  leading  countries  was  on  a  sound 
basis,  with  revenues  sufficient  to  care  for  expenditures.  It 
was,  moreover,  a  period  in  which  the  prices  of  diflFerent 
groups  of  commodities  were  in  rough  equilibrium ;  there  was 
at  no  time  any  violent  dispersion  of  prices  as  between  the 
various  groups  of  commodities. 

Now  the  data  drawn  from  such  a  period  are  in  this 
theory  used  to  predict  the  duration  of  a  business  depression 
in  the  present  era  when  conditions  are  utterly  different — 
when  domestic  prices  in  basic  groups  of  commodities  have 
been  thrown  completely  out  of  adjustment,  when  the  disrup- 
tion of  the  world-wide  international  financial  mechanism  is 
without  a  parallel  in  history,  when  unbalanced  national  bud- 
gets imperil  the  very  existence  of  present  governments;  in 
short,  when  the  foundations  of  organized  society  have  been 
shaken. 

We  must  clearly  abandon  the  doctrine  that  the  normal 
duration  of  a  business  depression  is  always  from  six  to  ten 


HOW  LONG  WILL  THE  DEPRESSION  ENDURE?        II3 

months.  We  abandon  it  the  more  confidently  in  view  of  the 
known  facts  as  to  the  duration  of  some  of  our  earher 
depressions.  In  the  early  nineties  and  the  late  seventies,  as 
we  have  already  seen,  the  "ordinary"  duration  was  not  from 
six  to  ten  months;  these  depressions  were  of  several  years' 
duration.  There  were  in  each  case  minor — very  minor — 
fluctuations  in  trade  during  the  period  of  the  depression ;  but 
there  was  nothing  resembling  a  sustained  revival  for  practi- 
cally six  years  in  the  seventies  and  for  four  years  in  the 
nineties. 

We  do  not  refer  to  these  earlier  depressions  for  the 
purpose  of  proving  that  the  present  depression  will  neces- 
sarily last  for  either  four  or  six  years.  Although  conditions 
during  the  depression  following  the  crisis  of  1873  resemble 
those  of  the  present  more  than  they  do  those  of  any  of  the 
minor  depressions  between  1903  and  191 4,  one  would  not  be 
warranted  in  insisting  that  the  parallel  is  close  or  that  much 
may  be  inferred  from  the  duration  of  the  depression  of  the 
seventies.  A  brief  description  of  the  conditions  obtaining 
during  the  latter  years  of  this  depression  and  of  the  forces 
which  appear  ultimately  to  have  conspired  to  restore  pros- 
perity will,  however,  prove  suggestive. 

Crisis  of  1873 

For  several  years  during  the  depression  of  1873- 1879 
interest  rates,  as  we  have  already  seen,  were  low ;  labor  was 
thoroughly  liquidated;  and  prices  were  down  to  "rock 
bottom"  although  not  altogether  in  equilibrium.  But  the 
situation  did  not  work  its  own  cure.  Purchasing  was  not 
resumed  and  prices  did  not  start  upward  immediately  after 
what  everyone  regarded  as  the  bottom  had  been  reached. 
Neither  psychology  nor  the  play  of  "natural"  economic 
forces  sufficed  to  bring  a  resumption  of  prosperity.  Business 
remained  in  the  doldrums. 


114  THE  SITUATION  AS  IT  REALLY  IS 

What  was  It  that  ultimately  broke  the  back  of  the 
depression  in  the  summer  of  1879?  The  early  months  of 
that  year  had  not  been  promising.  Very  much  depended 
upon  the  condition  of  agriculture.  The  outlook  for  the 
wheat  crop  was,  however,  mediocre,  and  the  prospect  for  a 
favorable  price  distinctly  poor.  The  year  1878  had  produced 
one  of  the  largest  European  wheat  harvests  on  record. 
"When  1879  was  well  advanced,  wheat  from  the  English 
farms  was  still  moving  in  quantity  to  storage  points ;  at  the 
close  of  March  the  stock  of  wheat  at  Liverpool  was  larger 
than  at  any  time  within  five  years."  ^  (At  this  period,  it 
should  be  understood,  Europe  ordinarily  still  produced  grain 
for  export.)  Accordingly,  the  American  prospect  was  any- 
thing but  encouraging.  Given  a  reasonably  good  European 
crop,  a  further  depression  in  American  wheat  prices  seemed 
inevitable. 

In  the  spring  and  early  summer,  however,  there  devel- 
oped in  England  the  most  untoward  weather  "known  to  the 
memory  of  living  man."  Extreme  cold,  accompanied  by 
continuous  rain  through  the  harvest  season,  made  the  wheat 
crop  almost  a  complete  failure.  Conditions  on  the  con- 
tinent were  not  very  much  better.  The  result  was  an  unpre- 
cedented demand  from  Europe  for  American  wheat.  At  the 
same  time  there  developed  in  the  United  States  extraordin- 
arily favorable  crop  conditions,  with  the  result  that  the 
American  wheat  yield  in  1879  broke  all  existing  records 
and  was  not  again  equaled  until  1891.  The  combination  of 
a  huge  crop  and  a  high  price  brought  an  increased  purchas- 
ing power  to  every  rural  community  in  the  grain  growing 
sections  of  the  country.  The  resulting  demands  for  goods 
were  soon  manifest  throughout  the  industrial  systems. 

Other  events,  largely  fortuitous,  combined  to  lay  the 


"Alexander  D.  Noyes,  "Forty  Years  of  American  Finance,"  page  53. 


HOW  LONG  WILL  THE  DEPRESSION  ENDURE?         1 15 

foundation  for  a  remarkable  revival  of  purchasing  power 
in  the  autumn  of  1879.    Noyes  tells  us  that :  ^ 

"The  crop  of  Indian  corn  was  the  largest  on  record;  this, 
too,  found  a  ready  and  profitable  export  market.  Cattle 
raised  on  the  interior  farms  were  sent  abroad  in  such 
numbers  that  the  foreign  trade  complained  that  British 
graziers  were  being  forced  out  of  the  British  market.  By 
a  rather  remarkable  coincidence,  the  famous  tide-water  pipe- 
line from  the  Pennsylvania  oil-wells  was  completed  in  1879, 
and  the  year's  export  of  this  product  rose  nearly  2  million 
barrels  over  the  highest  previous  record.  By  another  coin- 
cidence, equally  independent  of  any  events  already  noticed, 
the  cotton  crop  of  India  in  1879  was  a  partial  failure; 
Europe's  supply  on  hand  fell  off  30  per  cent  from  the 
autumn  stock  of  1878  and  50  per  cent  from  1877,  and 
with  the  consequent  heavy  purchases  by  foreign  spinners, 
the  season's  export  of  American  cotton  was  the  largest  ever 
yet  recorded." 

The  situation  at  this  time  was  complicated  by  a  monetary 
problem.  The  resumption  of  specie  payments,  i.e.,  the  re- 
demption of  greenbacks  in  gold,  occurred  on  January  i, 
1879.  The  confidence  resulting  from  a  return  to  sound 
money  was  not  sufficient,  however,  to  restore  prosperity,  as 
is  shown  by  the  persistence  of  the  depression  throughout  the 
first  half  of  1879.  Indeed,  if  it  had  not  been  for  the  unex- 
pected expansion  of  exports  that  occurred  and  the  resulting 
inflow  of  gold  from  Europe,  there  is  little  doubt  that  the 
attempt  to  resume  specie  payments  would  have  proved  a 
failure. 

It  was  thus  a  remarkable  concatenation  of  events — 
largely  fortuitous — that  broke  the  back  of  the  long  depres- 
sion of  the  seventies.     No  doubt  the  drastic  liquidation  that 


'  Alexander  D.  Noyes,  "Forty  Years  of  American  Finance,"  pages 
56,  57- 


Il6  THE  SITUATION  AS  IT  REALLY  IS 

had  occurred,  with  the  resuhing  low  interest  rates,  low 
wages,  low  prices  of  basic  raw  materials,  together  with  a 
plentiful  and  willing  supply  of  labor,  were  factors  conducive 
to  a  business  revival.  But  taken  alone,  they  had  proved  in- 
sufficient to  restore  prosperity.  Orders  on  the  books  were 
still  lacking — consumptive  demand  was  everywhere  lagging. 
Hence  industry  continued  to  languish  until  the  wheel  of 
fortune  gave  the  necessary  fillip  to  demand. 

Chance  Developments  and  Recovery 

To  guard  against  misinterpretation  it  must  be  reiterated 
that  these  events  of  the  depression  of  the  late  seventies  are 
cited  only  for  the  light  they  throw  upon  the  current  theory 
that  business  depressions  always  work  their  own  cure  within 
a  short  period  of  time.  We  do  not  conclude  from  the 
analysis  that  the  present  depression  will  necessarily  last 
several  years.  Indeed,  we  do  not  pretend  to  know  how  long 
the  present  depression  will  last.  We  incline  to  the  view, 
however,  that  the  process  of  liquidation  is  still  far  from  com- 
pleted, and  that  the  economic  retrogression  of  Europe  is  a 
very  definitely  bearish  factor  in  the  whole  industrial  outlook. 

In  general,  we  believe  that  whatever  may  be  true  of  the 
lesser  oscillations  of  business,  a  major  depression  is 
normally  broken  only  by  chance  developments.  It  is  possible, 
therefore,  that  some  fortuitous  chain  of  events,  which  no 
one  can  now  foresee,  will  bring  us  out  of  the  present 
depression  at  a  relatively  early  date.  But  if  we  are  to  face 
facts  and  weigh  the  possibilities  of  an  early  recovery  of 
economic  prosperity  in  the  United  States  and  in  Europe,  it 
is  important  that  we  disillusion  ourselves  of  the  notion  that 
business  depression  cannot  last  more  than  a  few  months 
or  a  year  or  so  at  the  most.  The  lesson  of  the  depression  of 
1873-1879  is  that  after  the  bottom  has  been  reached  it  is 
possible  for  business  to  stay  in  the  doldrums  for  a  long 


HOW  LONG  WILL  THE  DEPRESSION  ENDURE?        II7 

period  of  time.  The  industrial  machine  may  remain,  as  it 
were,  at  dead  center. 

Before  closing  this  discussion  of  the  probable  duration 
of  the  business  depression,  it  should  be  stated  that  few 
among  those  who  believe  that  the  bottom  of  the  present 
depression  has  been  reached — that  liquidation  has  now  run 
its  course — contend  that  a  period  of  great  prosperity  is  at 
hand.  What  they  urge  is  merely  that  the  worst  is  over; 
that  conditions  may  be  expected  to  show  a  slight  improve- 
ment in  the  near  future,  and  that  gradually  they  will  materi- 
ally improve.  Most  of  them  concede  that  there  is  still  a 
rocky  road  to  travel. 

Most  but  not  all.  There  are  some — not  economists — 
who  still  contend  that  the  great  need  for  goods  resulting 
from  five  years  of  unprecedented  destruction  of  wealth 
must  shortly  raise  both  Europe  and  the  United  States  out 
of  the  existing  depression.  Housing  is  everywhere  in 
arrears ;  railroads  and  public  utilities  have  not  been  rehabili- 
tated; the  capital  goods  generally  that  were  destroyed  dur- 
ing the  war  have  not  been  replaced.  Never  in  the  history  of 
the  world  was  there  so  great  a  need  of  intensive  industrial 
activity  as  now. 

Lack  of  Effective  Demand 

All  this  is  only  too  true.  But  it  does  not  follow  that 
the  mere  need  for  wealth  will  result  in  its  production.  The 
construction  of  additional  houses  and  factories,  and  the 
rehabilitation  of  railroads  will,  under  a  profit-making 
system,  be  undertaken  only  when  it  pays  to  do  so.  In  the 
language  of  economists,  there  must  be  not  merely  a  need; 
there  must  also  be  an  effective  demand — that  is  to  say, 
demand  backed  by  the  ability  to  buy.  Poland  needs  houses ; 
but  the  Polish  people  cannot  now  pay  cash  for  the  food 
required,  let  alone  houses.     Austria  needs  raw  materials; 


Il8  THE  SITUATION  AS  IT  REALLY  IS 

but  the  Austrians  are  starving,  and  they  must  mortgage 
their  future  because  they  have  no  means  of  paying  for  raw 
materials.  And  the  sad  part  of  it  all  is  that  many  of  these 
people  will  not  be  in  a  position  to  buy  even  food  until  some 
measure  of  industrial  prosperity  has  returned.  France  and 
Belgium  and  Germany  and  Italy  likewise  need  houses  and 
railroads,  factories  and  equipment — what  not — after  the 
terrible  destruction  of  four  years'  war.  But  the  rank  and 
file  of  the  people  who  alone  can  furnish  the  demand  for 
these  goods  have  not  now  the  purchasing  power  with  which 
to  buy  them.  And  they  will  not  have  until  something  again 
starts  the  wheels  of  industry  and  again  furnishes  them  with 
remunerative  employment. 

Such  building  as  has  occurred  since  the  Armistice  in  any 
of  the  European  countries — even  in  England — has  in  the 
main  been  subsidized  building.  The  effects  of  subsidies 
upon  government  finances  have  already  been  indicated. 
Nowhere  in  Europe  has  it  been  demonstrated  that  there  is 
an  effective  demand  for  building.  While  the  situation  in  the 
United  States  is  very  much  better  in  this  respect,  there  are 
few  who  seriously  contend  that  our  rent  problems  and  con- 
struction problems  have  been  definitely  settled. 

In  conclusion,  it  must  be  understood  that  in  all  the  fore- 
going analysis  we  have  been  speaking  only  of  the  situation 
as  it  may  develop  if  allowed  to  run  its  natural  course,  free 
from  governmental  or  other  organized  intervention.  There 
is  here  suggested,  of  course,  the  possibility  of  credit  exten- 
sions to  Europe  as  a  means  of  giving  the  initial  impetus  to 
a  resumption  of  purchases.  Since  further  credit  extension, 
however,  involves  political  as  well  as  economic  considera- 
tions, on  the  question  of  reparations  and  inter-Allied  debts, 
as  well  as  industrial  phenomena,  its  discussion  must  for  the 
present  be  postponed. 


CHAPTER  X 

ECONOMIC  AND  SOCIAL  DISINTEGRATION 

Time  as  a  Healer 

There  is  a  widespread  impression  that  time  is  the  great, 
indeed  the  only,  healer.  Notwithstanding  the  fact  that 
nearly  three  years  after  the  war  European  conditions  are 
on  the  whole  worse  than  ever,  there  are  those  who  still 
count  upon  the  mere  lapse  of  time  to  effect  an  ultimate 
restoration  of  the  shattered  economic  organization.  Have 
not  nations  in  the  past  always  recovered  from  the  ravages 
of  war  ?    Is  not  the  march  of  civilization  always  onward  ? 

The  simple  truth  seems  to  be  that  time  has  not  always 
wrought  the  precise  cure  which  the  doctors  have  desired. 
Something  significant  will  in  the  course  of  time  no  doubt 
develop  in  Europe,  even  if  conditions  are  allowed  to  drift. 
But  what?  Time  did  not  save  the  ancient  empires  of 
Babylon  and  Nineveh.  Time  did  not  prevent  the  over- 
throw of  the  Greek  and  Roman  civilizations.  Time — six 
centuries  of  time — did  ultimately  bring  the  world  out  of 
the  abyss  of  the  Dark  Ages.  Time,  after  a  period  of  fear- 
ful human  decimation,  stamped  out  the  black  death,  vir- 
tually unaided  by  medical  science.  Time  and  the  Thirty 
Years'  War  reduced  the  German  population  by  one-third; 
and  several  generations  of  time  ultimately  restored  this 
population.  The  fearful  human  costs  involved  in  these 
tragedies  of  time  are  known  to  every  student  of  history. 

Those  who  are  living  in  the  midst  of  epoch-making 
changes,  such  as  are  now  occurring,  usually  cannot  con- 
ceive that  the  civilization  which  they  have  come  to  regard 
as  established,  could  possibly  disintegrate.     It  is  unthink- 

119 


I20  THE  SITUATION  AS  IT  REALLY  IS 

able  that  the  great  industrial  civilization  of  the  nineteenth 
and  twentieth  centuries  may  possibly  have  reached  its  height 
in  August,  1 914,  and  may  now  be  in  the  fateful  processes 
of  dissolution.  At  the  conclusion  of  Chapter  V  on  national 
budgets  the  statement  was  made  that  "national  budgets, 
persistently  unbalanced,  will  ultimately  wreck  the  entire 
financial  and  economic  system."  The  moment  has  now 
arrived  when  we  must  show  why  and  how. 

Forces  of  Deterioration 

We  have  seen  that  it  is  not  at  all  impossible  that  the 
present  business  depression  may  continue  for  several  years. 
If  such  proves  to  be  the  case  it  is  clear  that  it  will  be 
found  impossible  in  nearly  every  country  in  Europe  to 
prevent  a  rapid  increase  in  government  debts.  Business 
depression  results  in  low  profits  and  incomes,  and  low 
profits  and  incomes  mean  reduced  taxes.  At  the  same 
time,  government  expenditures  tend  to  increase  wherever 
unemployment  insurance  and  subsidies  are  the  vogue. 
"Doles"  and  subsidies  for  railroads,  public  utilities,  educa- 
tion, etc.,  are,  in  fact,  now  found  in  practically  every  country 
in  Europe.  The  result  of  several  years  of  depression  would 
therefore  be  progressive  deterioration  of  national  finances. 

Looked  at  from  the  point  of  view  of  the  economic 
system  rather  than  from  the  angle  of  the  national  treasury, 
unbalanced  budgets  mean  consumption  in  excess  of  current 
production  and  a  consequent  trenching  upon  accumulated 
capital  resources.  Not  only  is  new  capital  not  constructed, 
but  existing  houses,  railroads,  factories,  and  equipment  are 
permitted  to  deteriorate.  The  result  is  relentless  economic 
retrogression.  Although  the  process  may  not  be  apparent 
to  the  casual  eye,  underneath  the  surface  of  things  the 
forces  of  dissolution  are  irresistibly  at  work. 

The  Bolshevists  of  Russia  chose  a  spectacular  method 


ECONOMIC  AND  SOCIAL  DISINTEGRATION  121 

of  wrecking  the  economic  organization  of  eastern  Europe. 
Seizing  the  reins  of  poHtical  power,  they  forcibly  dis- 
possessed the  existing  owners  of  capital  and  proceeded  to 
squeeze  the  industrial  organism  dry.  Unbalanced  budgets, 
with  paper  money  issues  to  meet  government  expenses, 
accomplish  the  same  end  in  more  prosaic  ways. 

Austrian  Debacle 

An  illustration  is  to  be  found  in  the  history  of  Austria 
since  the  war.  Austria  escaped  Bolshevism;  but  she  did 
not  escape  almost  complete  economic  and  social  demoraliza- 
tion. The  following  graphic  account  is  taken  from  the 
Report  of  the  Provisional  Economic  and  Financial  Com- 
mittee of  the  League  of  Nations  Relative  to  the  Financial 
Reconstitution  of  Austria.  ^ 

"From  October,  191 9,  the  value  of  Austrian  kronen 
fell  gradually  from  6.02  to  .95  Swiss  francs.  The  opposite 
upward  tendency,  which  within  a  short  period,  increased 
internal  prices  50,  60,  and  75  times,  disturbed  the  position 
very  considerably;  it  became  more  and  more  unstable  in 
proportion  to  these  increases.  All  those  whose  assets  were 
expressed  in  terms  of  money  were  ruined;  persons  with 
fixed  incomes,  pensioners — in  short,  the  middle  classes — 
have  been  utterly  crushed,  and  are  now  in  extreme  poverty. 
Those  who  possessed  or  manufactured  any  kind  of  goods 
secured,  nominally  at  least,  considerable  profits.  Everyone, 
therefore,  has  attempted  to  make  provision  against  this 
continual  fall  in  the  krone.  Wage-earners  and  state 
employees,  in  order  to  counteract  the  rise  in  prices,  ex- 
ercised collective  pressure  and  threatened  to  strike  almost 
daily.  But  whatever  success  is  obtained  in  this  daily 
struggle  to  adapt  conditions  of  life  to  the  increasing  fall 


*  Published  June,  1921. 


122  THE  SITUATION  AS  IT  REALLY  IS 

in  the  currency,  no  one  ever  ventures  to  effect  savings 
or  economies  in  kronen.  The  latter  would  in  a  short  time 
be  reduced  to  a  fraction  of  their  original  value.  It  is 
thought  better  to  satisfy  the  pleasures  of  the  moment. 
There  is,  therefore,  a  considerable  inducement  to  spend. 

"What  is  not  spent  in  unproductive  consumption  is 
invested  as  soon  as  possible  in  real  securities  and  estate, 
goods,  jewels,  antiquities,  industrial  securities,  etc.  But  this 
natural  tendency  towards  thrift  is  becoming  a  speculative 
fever.  In  the  apparent  profits  which  result  from  the  rise 
in  prices,  that  portion  which  represents  actual  labor  loses 
its  importance  and  becomes  negligible.  The  illusion  is 
fostered  that  profits  may  be  made  by  simply  hoarding 
goods  or  representative  securities.  Capital  is  thus  diverted 
from  productive  enterprise  to  speculative  uses.  Luxury  is 
growing  greater  and  greater  amongst  the  classes  which 
have  profited  most  by  this  kind  of  speculation,  whilst  the 
old  middle  classes,  which  are  the  guardians  of  tradition  and 
social  culture,  are  sinking  deeper  into  misery." 

The  situation  in  the  Balkan  States,  in  Hungary,  and 
in  Poland  differs  from  that  in  Austria  only  in  degree  and 
time.  Time,  moreover,  bids  fair  to  reduce  all  to  the  same  ap- 
proximate level.  Indeed,  all  the  nations  east  of  the  Rhine — 
excepting  the  Scandinavian  countries — have  been  traveling 
rapidly  in  the  direction  that  Austria  has  already  taken.  Note 
the  following  account  of  recent  developments  in  Poland: 

"According  to  figures  quoted  by  the  Finance  Minister, 
Poland  is  only  covering  20  per  cent  of  her  expenditures 
out  of  revenue.  With  the  steady  decline  of  the  currency, 
wages  are  rapidly  rising.  From  April,  1920,  to  January, 
192 1,  wages  rose  fivefold,  while  the  cost  of  living  advanced 
not  quite  four  times."  ^ 


*From  the  (London)  Economist,  July  2,  1921. 


ECONOMIC  AND  SOCIAL  DISINTEGRATION  1 23 

Budgetary  Difficulties 

When  once  this  process  of  financial  retrogression  has 
got  well  under  way,  it  becomes  practically  impossible  to 
check  it.  It  is  easy  to  pass  brave  resolutions  that  taxes 
should  be  increased  and  that  expenditures  should  be  rigidly 
curtailed,  but  it  is  the  hardest  task  in  the  world  to  carry 
out  such  a  fiscal  policy.  Unemployment  insurance,  pen- 
sions, and  transport,  public  utility,  and  other  subsidies  must 
be  continued  if  social  unrest  of  a  serious  nature  is  to  be 
prevented.  The  least  that  can  occur  when  such  policy  of 
retrenchment  is  instituted  is  the  dethronement  of  the  party 
in  power  and  the  election  of  an  opposition  party  that  will 
restore  the  doles  and  subsidies.  Moreover,  to  stop  sum- 
marily all  these  expenditures  would  add  to  the  demoraliza- 
tion of  economic  and  social  conditions. 

How  difficult  is  the  task  of  balancing  budgets  may  be 
seen  from  recent  developments  in  Poland.  The  present 
Finance  Minister  is  determined  to  institute  rigid  economy 
in  government  and  check  the  process  of  inflation.  The 
strength  of  his  support  from  the  business  and  financial  press 
may  be  judged  from  the  fact  that  when  the  Polish  Cabinet 
recently  voted  a  supplementary  paper  issue  of  8  billion 
marks,  and  the  Finance  Minister  resigned  in  protest,  the 
Cabinet  was  bitterly  attacked  by  the  press.  The  result  was 
the  repeal  of  the  authorization  of  additional  paper  and  the 
recall  of  the  Minister  to  office.  But  further  inflation  either 
this  year  or  next  seems  nevertheless  certain,  for  one  is 
amazed  to  learn  that  all  the  Finance  Minister  hopes  to 
accomplish  is  to  "balance  the  budget"  by  means  of  domestic 
and  foreign  loans.  It  is  perhaps  unnecessary  to  state  that 
in  the  event  government  loans  can  be  marketed  in  Poland 
under  present  conditions — a  remarkably  courageous  assump- 
tion— the  government's  financial  obligations  for  the  ensu- 
ing   year    will    thereby    only    be    increased.     Additional 


124  THE  SITUATION  AS  IT  REALLY  IS 

government  loans  may  be  a  lesser  evil  than  the  issue  of 
more  paper  money;  but  it  is  nevertheless  an  evil.  Budgets 
are  not  to  be  balanced  by  going  still  further  into  debt. 

It  is  suggested  in  every  country  that  the  veritable  host 
of  employees  and  hangers-on  who  now  clutter  govern- 
ment offices  and  pay-rolls  should  be  summarily  reduced. 
But  in  many  countries  the  governments  dare  not  follow 
such  a  policy,  because  it  would  probably  result  in  unem- 
ployment and  discontent  of  a  revolutionary  character.  This 
would  certainly  be  the  result  if  it  were  accompanied  by 
the  cessation  of  doles,  pensions,  and  subsidies.  Govern- 
ment expenditures  for  such  purposes  and  the  padding  of 
official  pay-rolls  have  been  the  price  paid  for  saving  eastern 
and  central  Europe — including  Germany — from  social  revo- 
lution during  the  past  three  years.  Industrial  unrest  is 
held  in  abeyance,  it  is  true,  but  the  cost  mounts  from  month 
to  month  with  never  ending  regularity. 

Business  Demoralization 

Government  deficits,  price  inflation,  and  fluctuating 
exchanges  rapidly  undermine  business  enterprise.  Not  only 
are  the  risks  of  ordinary  industry  greatly  increased;  but 
the  sources  of  both  private  and  government  credit  are  in 
time  dried  up.  No  nation  can  pay  its  debts  abroad  so  long 
as  its  budget  remains  unbalanced  and  domestic  consumption 
is  in  excess  of  domestic-  production.  And  no  private  citizen 
can  long  maintain  his  credit  standing  in  foreign  countries 
when  his  government's  finances  are  approaching  irremedi- 
able disaster.  Private  and  public  credit  are  indissolubly 
linked  together. 

Domestic  credit  is,  moreover,  demoralized  by  the  same 
process.  We  have  already  seen  how  in  Austria  no  one 
ever  ventures  to  effect  savings  in  kronen  and  how  ordinary 
constructive  industry  has  given  way  to  a  fever  of  specula- 


ECONOMIC  AND  SOCIAL  DISINTEGRATION  1 25 

tion.  This  has  always  been  an  outstanding  characteristic 
of  disordered  government  and  private  finance.  Why  stand 
to  lose  one's  interest  or  profits  from  ordinary  financial  or 
industrial  undertakings  as  a  result  of  uncontrollable  price 
fluctuations,  when  fortunes  may  be  made  in  speculation? 
It  is  not  uncommon  in  Austria  and  other  countries  of  central 
and  eastern  Europe  for  a  commodity  to  pass  through  the 
hands  of  fifteen  or  twenty  speculative  middlemen — each  tak- 
ing toll  through  price  advances — before  it  reaches  the  final 
consumer.  Such  business  activity  yields  monetary  profits, 
but  it  does  not  increase  production.  On  the  contrary  it 
demoralizes  industry. 

The  rapid  mounting  of  prices  and  the  accompanying 
disorganization  of  industry  intensify  social  unrest.  Wages 
must  be  rapidly  advanced  under  penalty  of  strikes,  and  the 
dominance  of  the  masses  over  the  policies  of  government 
is  steadily  increased.  This,  of  course,  progressively  com- 
plicates the  difficulties  of  the  situation  and  but  paves  the 
way  for  still  further  disorganization.  Sooner  or  later 
certain  basic  industries,  such  as  public  utilities  and  trans- 
port, are  broken  down,  and  with  this  calamity  disappears 
practically  all  hope  of  saving  the  whole  complex  industrial 
and  commercial  mechanism,  the  very  existence  of  which 
depends  upon  the  efficient  functioning  of  these  "key" 
industries. 

One  of  the  factors  that  contribute  most  to  the  demorali- 
zation of  trade  and  industry  when  once  a  nation  has  started 
along  the  road  we  have  been  describing,  is  the  rapid  dis- 
appearance of  that  business  or  commercial  morality  which 
constitutes  the  very  foundation  of  the  modern  industrial 
and  credit  system.  It  is  said  that  commercial  honesty  is 
almost  unknown  in  eastern  Europe  today.  Why  should  any- 
one be  honest  in  his  dealings,  when  the  almost  certain  result 
is  elimination  from  the  field  of  business  and  starvation  in  the 


126  THE  SITUATION  AS  IT  REALLY  IS 

not  distant  future?    Dishonesty  becomes  not  only  the  best 
but  the  only  policy. 

Here  lies,  moreover,  one  of  the  greatest  obstacles  to  the 
reconstruction  of  the  broken  countries  of  eastern  Europe. 
It  is  not  merely  necessary  to  restore  finances,  transport 
systems,  etc.  The  moral  foundations  of  commercial  society 
must  also  be  reconstructed.  This  is  perhaps  the  most  diffi- 
cult task  of  any. 

The  Case  of  the  Netherlands 

In  the  analysis  thus  far  we  have  been  describing  the 
process  of  social  and  economic  disintegration  as  it  has 
already  been  illustrated  in  eastern  Europe.  In  the  other 
countries  of  continental  Europe  the  situation  now  differs 
only  in  degree.  The  price  that  governments  in  power 
must  everywhere  pay,  if  they  are  to  continue  in  office,  is 
the  continued  increase  of  the  government  debt.  No  govern- 
ment, under  present  conditions,  dares  to  curtail  subsidies, 
unemployment  insurance,  etc.,  and  no  government  dares 
to  increase  the  burden  of  taxes  sufficiently  to  cover  present 
expenditures.  The  government  in  power  knows  that  politi- 
cians out  of  power  would  seize  the  opportunity  created  by 
such  a  policy  and  return  to  office  on  a  platform  that 
promised  relief  for  the  masses.  It  cannot  be  too  strongly 
emphasized  that  political  exigencies  make  thorough-going 
fiscal  reform  at  the  present  time  a  practical  impossibility. 

Take  the  case  of  the  Netherlands.  Here  was  a  neutral 
country — one  that  made  tremendous  profits  during  the  war; 
one  whose  industrial  and  financial  organization  was  not 
disrupted  by  huge  war  loans  and  issues  of  paper  money. 
The  army  had  to  be  greatly  increased,  it  is  true,  and  many 
thousands  of  refugees  had  to  be  cared  for.  But  still  the 
Netherlands  was  popularly  supposed  to  have  emerged  from 
the  war  in  a  very  strong  financial  position.     Nevertheless, 


ECONOMIC  AND  SOCIAL  DISINTEGRATION  1 27 

the  Netherlands'  budget  Is  now  seriously  unbalanced,  with 
no  present  prospect  of  improvement.  Indeed,  if  the  business 
depression  continues,  it  is  foreseen  that  the  deficit  will 
rapidly  increase.  The  Hollanders,  like  the  people  of  other 
countries — not  excluding  those  of  the  United  States — 
naively  assumed  that  the  war  had  laid  the  basis  for  a  period 
of  unprecedented  prosperity,  and  that  the  aspirations  of 
mankind  for  a  higher  standard  of  living  and  a  richer  ex- 
istence generally  could  now  find  immediate  fulfilment. 

A  program  of  beneficent  social  legislation  was  accord- 
ingly undertaken,  and  unemployment  insurance,  pensions, 
educational  subsidies,  etc.,  were  established.  At  the  same 
time,  the  efficiency  of  labor  declined — as  in  other  countries 
— and  the  number  of  working  hours  was  reduced.  The 
result  was  a  government  fiscal  deficit  of  serious  proportions, 
even  in  the  good  year  of  1920.  This  year,  in  consequence 
of  the  business  depression,  it  will  be  greatly  increased. 
Meanwhile  the  government  in  power  is  popular  with  the 
masses,  and  it  knows  only  too  well  that  the  surest  means 
of  losing  favor  is  to  abandon  the  present  policy  for  one  of 
financial  conservatism.  Thus  even  Holland  has  been  drawn 
into  the  current  that  leads  to  progressive  financial  deteriora- 
tion. This  in  spite  of  the  fact  that  virtual  disarmament  has 
been  achieved. 

British  Situation 

Take  the  case  of  Great  Britain.  Last  year,  as  we  have 
seen,  this  nation  of  financial  genius  nominally  succeeded  in 
balancing  the  government  budget  and  in  actually  reducing 
the  outstanding  debt,  though,  as  we  have  seen,  it  was  neces- 
sary for  the  taxpayers  to  borrow  a  considerate  portion  of 
their  tax  money. 

In  consequence  of  the  business  depression  Great  Britain 
will  this  year  in  all  probability  be  faced  with  an  outright 


128  THE  SITUATION  AS  IT  REALLY  IS 

deficit.  Now  the  tax  burden  cannot  well  be  increased,  and 
the  present  Coalition  government,  although  it  is  being  sub- 
jected to  the  strongest  pressure  from  the  financial  and 
business  interests  and  from  the  middle  classes,  is  not  disposed 
to  make  any  radical  reduction  in  expenditures.  A  little  may 
be  saved,  however,  by  reducing  the  number  of  government 
employees  f  but  it  will  be  only  a  drop  in  the  bucket.  Interest 
on  the  public  debt,  unemployment  doles,  and  pensions  are 
the  major  items,  and  these  the  government  is  afraid  to  re- 
duce at  the  present  time.  New  military  expenses  may,  how- 
ever, be  reduced  in  another  year.  We  shall  return  to  this 
question  in  the  last  chapter  which  is  concerned  with  the  real 
remedies  for  the  present  situation. 

The  political  future  of  England  is  shrouded  in  uncer- 
tainty. The  present  government  is  without  any  constructive 
policy  and  appears  to  be  disliked  all-around.  But  there  is 
no  leader  in  sight  with  the  ability  to  reform  the  shattered 
ranks  of  British  liberalism ;  and  for  the  present  at  least,  the 
Labor  party  appears  to  be  too  harried  and  too  divided  in 
counsel  to  carry  an  election.  Immediately  speaking,  there- 
fore, a  new  Coalition  government  appears  to  be  the  most 
likely  political  development. 

But  what  would  such  a  government  do?  If  it  should 
attempt  to  eliminate  unemployment  doles  and  pensions,  the 
hand  of  the  Labor  party  would  be  greatly  strengthened  and  it 
would  only  be  a  question  of  time  until  the  latter  would  win  an 
election.  If,  on  the  other  hand,  such  a  government  should 
confine  its  efforts  merely  to  the  effecting  of  minor  economies, 
it  could  not  keep  the  national  budget  in  balance — assuming  a 
prolonged  period  of  business  depression.  Even  in  Great 
Britain  the  general  situation  is  therefore  one  of  extreme 
gravity. 


•The  ntunber  is  now,  in  fact,  greater  than  it  was  at  the  time  of 
the  Armistice. 


ECONOMIC  AND  SOCIAL  DISINTEGRATION  129 

Labor  Ujtirest 

In  one  important  respect  the  situation  in  Europe,  as  noted 
in  a  previous  chapter,  appears  to  have  improved  materially 
since  last  year.  "Labor  unrest  is  rapidly  subsiding."  The 
business  depression  has  proved  no  less  a  shock  to  European 
than  to  American  labor.  The  workers  in  the  nations  of 
western  Europe  are  now  clearly  on  the  defensive.  But  what 
will  happen  in  case  the  business  depression  continues  for 
several  years?  May  labor  be  expected  to  remain  quiescent, 
offering  but  a  passive  resistance  to  the  forces  of  "detestable 
economic  laws"  ?    There  is  little  ground  for  such  a  belief. 

Labor  has  for  some  time  believed — whether  rightly  or 
wrongly,  we  need  not  now  inquire — that  there  is  something 
fundamentally  wrong  with  the  existing  system  of  wealth 
distribution.  It  is  widely  believed  that  "there  is  enough  for 
everyone  if  only  it  were  fairly  divided."  As  a  result  of  the 
war,  labor  has  also  been  coming  to  believe  that  there  is 
something  fundamentally  wrong  with  the  system  of  wealth 
production.  During  the  post-war  industrial  boom  this  con- 
viction was  somewhat  in  abeyance,  but  it  is  now  cropping 
out  again  with  renewed  vigor,  and  the  longer  the  business 
depression  lasts,  the  more  deeply  rooted  this  conviction  will 
become.  Millions  of  men  unable  to  procure  work  will  sooner 
or  later  seek  to  find  a  remedy  in  political  action.  Not  even 
unemployment  doles  can  permanently  allay  the  spirit  of  re- 
sentment against  those  who  hold  the  reins  of  power  and  are 
apparently  responsible  for  the  condition  of  affairs.  Wit- 
ness, for  example,  our  American  greenback  movement  of  the 
late  seventies,  and  the  populist  and  free-silver  agitations  of 
the  nineties. 

A  prolonged  period  of  hard  times  has  seldom  failed  to 
produce  mass  political  action  in  one  form  or  another.  It 
may  not  be  bolshevism  or  communism;  it  may  not  even  be 
state  socialism,  as  that  term  has  commonly  been  understood. 


I30  THE  SITUATION  AS  IT  REALLY  IS 

The  movement  would  very  likely  assume  different  forms  in 
different  countries.  But  that  inexperienced  and  perhaps  in- 
judicious leaders,  backed  by  the  masses,  will  in  one  way  or 
another  take  control  of  government  in  practically  every 
country  in  Europe  in  the  event  of  a  protracted  business 
depression,  is  far  from  improbable. 

Assuming  Labor  in  Power  in  England 

In  England,  it  is  more  than  possible  that  the  Labor  party 
would  gain  control  of  the  government.  In  case  this  should 
occur  it  is  interesting  to  speculate  upon  the  probable  drift 
of  events.  We  have  the  greatest  sympathy  for  the  aspira- 
tions of  British  workers  and  their  leaders.  It  is  all  too  true 
that  England's  industrial  greatness  has  been  made  possible 
through  the  payment  of  bare  subsistence  wages  to  labor. 
And  as  Mr.  Lloyd  George — in  one  of  his  earlier  incarnations 
— so  well  said,  "The  average  Englishman  is  but  a  trespasser 
in  the  land  of  his  birth."  Does  it  follow,  however,  that  the 
coming  power  at  the  present  time  of  the  British  Labor 
party  would  be  for  the  best  interest  of  the  world?  It  is 
very  doubtful. 

Whatever  may  be  the  present  views  of  party  leaders, 
there  can  be  little  doubt  that  present  money  wages  would  be 
maintained,  and  present  subsidies  and  unemployment  doles 
would  be  continued,  if  not  increased.  Labor  would  doubt- 
less insist  on  maintaining,  if  not  increasing,  present  standards 
of  living.  An  attempt  might  well  be  made  to  impose  a  capital 
tax.  But  at  this  point  capitalists  would  certainly  revolt. 
There  would  be  a  great  capital  hegira,  similar  to,  but  prob- 
ably much  more  extensive  than,  that  which  already  has  oc- 
curred from  Germany.  Industry  would  shortly  have  to  be 
taken  over  and  operated  by  labor. 

In  view  of  the  necessity  for  Englishmen  to  meet  the  in- 
dustrial competition  of  other  nations,  there  is  little  reason  to 


ECONOMIC  AND  SOCIAL  DISINTEGRATION  1 31 

believe  that  nationalized  British  industry — which  would  be 
expected  to  support  the  working  population  at  "satisfactory" 
living  standards — could  compete  effectively  in  world 
markets.  If,  however,  similar  developments  were  occurring 
simultaneously  in  other  countries,  the  situation  in  this  re- 
spect would  of  course  be  somewhat  different,  because  in  all 
countries  labor  would  then  be  confronted  with  the  practically 
impossible  task  of  producing  as  much  as  "reasonable  living 
standards"  require.  Budgets  would  in  all  probability  be 
more  seriously  unbalanced  than  ever,  and  the  printing  press 
would  appear  to  be  the  only  way  out.  The  process  of  price 
inflation  might  for  a  time  create  the  impression  that  the  "new 
day"  had  at  last  been  ushered  in,  when  in  fact  economic 
retrogression  would  be  proceeding  at  an  accelerated  pace. 

It  is  unnecessary  here  to  conjecture  what  effect  such  a 
political  outcome  would  have  upon  the  unity  of  the  British 
Empire.  One  thing  is  certain,  however,  that  stability  in 
world  affairs  would  not  be  increased;  and  more  than  any- 
thing else  the  world  needs  stability,  both  economic  and 
political.  More  than  anything  else,  the  co-operation  of  rel- 
atively strong  governments,  such  as  those  of  Great  Britain 
and  the  United  States,  is  required  in  promoting  peace  and 
in  re-establishing  trade  and  industry.  Indeed,  without  the 
co-operation  of  these  two  great  divisions  of  the  Anglo-Saxon 
race,  there  is  little  hope  for  political  and  social  stability  in 
the  world  of  the  twentieth  century. 

Distribution  of  British  National  Income 

We  have  said  in  a  previous  paragraph  that  a  Labor  party 
in  power  would  attempt  to  maintain  living  standards  un- 
warranted by  the  volume  of  production.  If  so,  the  accumu- 
lated supply  of  capital  would  be  steadily  depleted,  the  volume 
of  production  would  gradually  decrease,  and  the  standard  of 
living  would  gradually  be  forced  to  lower  and  lower  levels. 


132  THE  SITUATION  AS  IT  REALLY  IS 

This  is  exactly  what  has  been  occurring  since  the  Armistice, 
even  under  the  Coahtion  government;  and  the  world  is  al- 
ready beginning  to  pay  the  penalty.  The  following  figures 
of  the  distribution  of  the  national  income  in  Great  Britain 
in  1950  as  compared  with  1907  are  little  short  of  appalling. 
They  are  compiled  by  Edgar  Crammond,  the  English  sta- 
tistician to  whom  reference  has  been  made  in  a  preceding 
chapter.* 

Percentage  of 
Total  Income 

1907  1920 

Food,  drink,  and  tobacco 224  28.4 

Dress   11.5  12.5 

House    11.4  8.0 

National  services  8.5  23.0 

Miscellaneous 8.6  8.0 

Professional    and    domestic    services,    not    comprised 

in  above  items 4.6  4.5 

Cost  of  distribution 9.3  10.2 

Depreciation  and  maintenance  of  capital 8.3 

New  investments  at  home 7.4  \-  S-4 

New  investments  abroad 8.0 


Three  striking  facts  are  revealed  by  these  data :  ( i )  In 
1920  the  British  people  spent  7  per  cent  more  of  the  national 
income  on  food,  drink,  tobacco,  and  dress  than  they  did  in 
1907.  They  lived  substantially  better.  (2)  Government 
expenditures  (national  services)  were  almost  trebled.  (3) 
The  percentage  devoted  to  the  maintenance  of  existing  rail- 
roads, warehouses,  factories,  equipment,  etc.,  and  to  the 
creation  of  new  capital  equipment  at  home  and  abroad  (the 
last  three  items  in  the  table)  has  been  reduced  from  a  total 
of  23.7  to  5.4. 

The  grim  truth  is  that  in  the  boom  year  of  1920  England 


*  Printed  in  the  London  Times,  Jtine  28,  1921. 


ECONOMIC  AND  SOCIAL  DISINTEGRATION  1 33 

did  not  even  maintain  the  supply  of  existing  capital — ^the 
industrial  machine  was  being  allowed  to  run  down.  Note  the 
8.3  per  cent  spent  in  1907  for  depreciation  and  maintenance 
alone,  as  compared  with  the  5.4  per  cent  in  1920  for  all 
capital  purposes.  These  figures  conclusively  demonstrate  that 
in  the  "prosperous"  year  of  1920  Great  Britain  was  actually 
going  backward.  She  was  living  much  beyond  her  means. 
Mr.  Crammond  estimates  that  for  1921  the  national  in- 
come, in  terms  of  money  values,  will  be  so  greatly  reduced 
that  about  32  per  cent  will  be  required  to  meet  government 
expenses.  There  is,  moreover,  not  the  slightest  doubt  that 
the  percentage  spent  for  capital  replacement  and  new  con- 
struction will  be  even  less  than  a  year  ago.  Comparable  data 
on  the  distribution  of  national  income  in  other  European 
countries  are  not  available.  But  the  evidence  afforded  by 
trade  statistics,  national  budgets,  etc. — all  indicates  that  in 
practically  every  continental  country  the  situation  in  this 
respect  is  substantially  worse  than  in  Great  Britain,  or  if 
not  immediately  worse,  has  been  temporarily  alleviated  only 
by  huge  additions  to  the  national  debts.  Ever)rwhere  those 
living  on  pensions,  interest  on  government  bonds,  and  un- 
employment insurance  are  being  supported  out  of  capital 

Decline  of  European  Capital  Supply 

Let  it  be  understood  that  we  are  holding  no  particular 
group  responsible  for  this  condition  of  affairs.  We  are 
merely  calling  attention  to  the  startling  facts  in  the  situation. 
No  single  group,  indeed,  is  to  be  blamed.  This  whole  situa- 
tion was  doubtless  an  inevitable  aftermath  of  the  war.  Few 
people — in  any  walk  of  life — would  admit  for  a  moment  that 
post-war  standards  of  living  would  have  to  be  reduced. 
Indeed,  the  chorus  proclaiming  an  era  of  improved  living 
conditions  for  everyone  was  all  but  unanimous.  It  is  one 
of  the  most  amazing  illustrations  of  the  practical  universality 


134  THE  SITUATION  AS  IT  REALLY  IS 

of  economic  ignorance  that  most  people  should  have  confi- 
dently believed  that  four  years  of  concentrated  wealth  de- 
struction had  placed  the  world  in  a  position  to  expand  its 
scale  of  consumption.  The  bitter  truth  has  not  even  yet 
come  home  to  more  than  the  merest  fraction  of  the  world's 
population,  that  the  war  means  lowered  standards  of  living 
for  the  world  as  a  whole  for  at  least  a  generation.  Until 
this  truth  does  penetrate  to  the  masses  of  mankind,  there  is 
little  hope  of  checking  the  progressive  reduction  of  wealth- 
producing  power  that  is  now  occurring. 

The  financial  and  industrial  system  of  our  day,  if  it  is 
to  endure,  must  annually  effect  such  a  distribution  of  the 
national  income  and  of  the  national  productive  power  that 
existing  capital  goods — railways,  factories,  equipment,  etc. 
— are  maintained  in  good  repair.  A  failure  to  do  so  means, 
inevitably,  persistent  economic  retrogression.  If  wealth  pro- 
duction is  to  be  increased  as  the  years  go  by,  and  if  the  low 
existing  standards  of  living  are  to  be  raised,  additions  must 
be  made  each  year  to  the  present  depleted  capital  equipment 
of  society.  These  are  elemental  economic  principles,  which 
no  one  can  successfully  controvert. 

Now  the  truth  is  that  the  world  as  a  whole — even  in  the 
halcyon  days  of  the  generation  immediately  preceding  the 
war — did  not  possess  much  of  a  growing  margin,  did  not 
annually  add  very  much  to  the  existing  supply  of  capital 
goods.  Estimates  vary  somewhat,  but  for  the  world  as  a 
whole  the  annual  capital  increment  was  probably  somewhere 
between  5  and  10  per  cent.  In  that  great  investing  nation. 
Great  Britain,  in  the  excellent  year  1907  it  was  only  a  little 
more  than  15  per  cent,  according  to  Crammond's  estimates 
given  above.  The  incalculable  economic  costs  of  the  war 
may  in  no  way  be  better  understood  than  by  comprehending 
that  in  all  Europe  this  margin  of  saving — this  means  of 
economic  growth  and  progress — ^has  been  wiped  out. 


ECONOMIC  AND  SOCIAL  DISINTEGRATION  135 

Supreme  Problem  of  Generation 

If  the  economic  organization  of  the  twentieth  century  is 
to  survive,  somehow  this  margin  that  constitutes  progress 
must  be  restored ;  at  the  very  minimum  existing  capital  goods 
must  annually  be  replaced.  Where  does  one  find  assurance 
that  this  will  occur?  If  the  reply  is  that  what  the  world 
needs  is  thrift — relentless,  never-ceasing  thrift — it  will  be 
well  to  reflect  that  if  by  thrift  is  meant  rigid  curtailment  of 
consumption,  the  business  depression  will  not  thereby  be 
quickly  overcome.  If  prosperity  is  to  be  restored  there  must 
be  a  revival  of  demand — of  consumptive  demand.  Addi- 
tional factories,  etc.,  will  not  be  constructed  unless  there  is  an 
effective  demand  for  the  products  which  such  factories  would 
have  for  sale ;  nor  will  additional  factories  be  constructed  so 
long  as  the  output  of  present  factories  cannot  find  a  profit- 
able market.  The  way  to  overcome  depression  is  not  by 
intensifying  the  present  lack  of  demand  for  consumption 
goods. 

On  the  other  hand,  lavish  spending  and  extravagant  con- 
sumption are  equally  disastrous,  as  events  since  the  Armi- 
stice have  clearly  demonstrated.  To  make  a  long  and  far 
from  simple  story  short,  if  the  economic  world  is  again  to  be 
set  moving  in  the  direction  of  material  progress,  we  must 
somehow  secure  a  return  of  prosperity,  develop  a  high  de- 
gree of  industrial  efficiency,  expand  output,  and  devote 
meanwhile  a  sufficient  percentage  of  our  social  energy  to  the 
creation  of  capital  to  ensure  the  replacement  of  the  produc- 
tive wealth  that  is  annually  worn  out,  and  to  add  a  little — 
if  ever  so  little — to  the  existing  stock  of  capital  goods.  This 
is  the  supreme  problem  of  the  present  generation. 

If  the  business  depression  should  in  the  near  future  be 
broken — either  as  the  result  of  some  fortuitous  development 
or  in  consequence  of  co-operative  international  economic 
policy — the  task  of  restoring  the  margin  that  spells  progress 


136  THE  SITUATION  AS  IT  REALLY  IS 

will  of  course  be  rendered  much  easier.  But  let  none  assume 
that  it  would  then  automatically  take  care  of  itself.  It  will 
be  well  to  recall  that  Great  Britain,  for  example,  had  pros- 
perity in  the  year  1920;  yet,  as  we  have  seen,  the  existing 
supply  of  capital  goods  was  not  even  maintained.  A  part  of 
the  problem  is  obviously  that  of  somehow  lessening  the 
burden  of  taxation  to  the  end  that  funds  may  be  available 
for  investment. 

Change  of  Economic  Systems 

Moreover,  even  if  the  depression  is  shortly  broken,  it 
will  still  be  true  that  society  must  for  years  be  content  with 
a  lower  standard  of  living  than  it  had  obtained  in  the  latter 
years  before  the  war.  The  economic  machine  has  been  so 
thoroughly  disrupted  and  the  producing  power  of  the  world 
so  seriously  reduced,  that  it  will  require  many  years  to  re- 
store our  former  standards  of  living.  It  cannot  be  too 
strongly  emphasized  that  the  real  economic  costs  of  the  war 
are  yet  to  be  borne  by  the  world — borne  through  reduced 
income  for  nearly  everyone ;  borne  unfortunately  (  for  society 
is  thus  organized)  through  downright  privation  for  the  great 
masses  of  people. 

If  the  present  economic  system,  whose  many  defects  must 
be  admitted,  has  broken  down  under  the  unprecedented 
shock  of  the  war,  why,  it  may  be  asked,  attempt  to  restore 
it?  Why  not  substitute  a  new  system  in  which  the  defects  of 
the  old  are  eliminated?  Aside  from  the  failure  of  anyone 
to  suggest  a  workable  economic  system  to  take  the  place  of 
the  present  one,  there  is  a  fundamental  objection  to  attempt- 
ing any  extreme  social  and  industrial  experiments  at  such  a 
time  as  this.  The  present  complex  international  industrial 
system  is  the  result  of  a  gradual  growth  of  centuries.  Not 
only  is  the  complex  machinery  of  wealth  production  and  dis- 
tribution in  each  country  welded  into  this  economic  system ; 


ECONOMIC  AND  SOCIAL  DISINTEGRATION  137 

but  the  entire  political  and  social  organization  is  inextricably 
bound  up  with  it. 

Granted  that  the  existing  economic  system  has  serious — 
nay,  fundamental — deficiencies,  what  assurance  can  anyone 
give  that  an  attempt  in  these  disordered  times  to  substitute 
some  other  conceivable  system  for  it,  would  not  result  in 
utter  disaster?  The  present  depreciated  and  unstable 
exchanges  of  the  world,  to  take  a  single  example,  work  havoc 
with  commerce  and  with  production.  But  what  would  one 
suggest  as  a  practicable  and  workable  alternative  ?  Interna- 
tional barter  has  been  tried  since  the  war ;  and  it  has  failed. 
No  other  suggestion  of  a  substitute  for  the  exchange  mecha- 
nism has  been  advanced  during  the  three  years  of  need. 

The  extensive  reforms  of  the  existing  economic  order — 
which  every  intelligent  student  concedes  to  be  necessary — 
must  wait  until  a  more  propitious  time.  Experience  teaches 
that  violent  changes  and  extreme  experiments,  particularly 
in  a  time  of  economic  stress,  are  the  surest  means  of  destroy- 
ing wealth  production  and  of  intensifying  the  disorders  they 
are  intended  to  overcome.  The  great  requirement  in  the 
present  world  emergency  is  to  restore,  as  well  as  may  be,  the 
normal  functioning  of  the  existing  economic  system. 

Problem  an  International  One 

In  concluding  this  analysis  of  the  economic  and  social 
consequences  of  the  war,  the  authors  feel  impelled  to  caution 
the  reader  against  a  not  improbable  misinterpretation.  Since 
pre-Armistice  days,  various  writers  have  suggested  the  pos- 
sibility of  an  economic  collapse  in  Europe  following  the  war. 
They  have  spoken  of  the  war  as  marking  the  end  of  an 
economic  and  social  era.  In  nearly  every  case  the  meaning 
of  this  suggestion  has  been  misunderstood.  To  the  average 
person  any  suggestion  of  European  economic  and  social  dis- 
integration carries  with  it  the  thought  that  all  of  Europe  is 


138  THE  SITUATION  AS  IT  REALLY  IS 

overnight  to  sink  beneath  the  waters  of  the  sea,  or  to  be 
consumed  in  some  sort  of  gigantic  social  conflagration. 
Great  bankers  in  sober  addresses  before  staid  business  men 
have  been  known  to  insist  with  vehemence  that  Europe  can- 
not possibly  "go  under."  Europe,  it  is  urged,  has  never  gone 
down,  however  great  the  strain  to  which  she  has  been  sub- 
jected; and  when  all  the  present  prophets  of  disaster  are 
dead  and  gone,  civilized  men  will  still  be  living  on  the  conti- 
nent of  Europe  and  in  the  islands  west  of  the  channel. 

The  point  is  not  that  Europe  is  to  be  plunged  over- 
night into  some  unfathomable  abyss,  never  to  rise  again. 
The  point  is  not  that  every  living  being  from  the  Bay  of 
Biscay  to  the  Ural  Mountains,  from  the  Arctic  Ocean  to  the 
Mediterranean  Sea,  is  to  be  destroyed.  The  point  is  only 
that  in  present  conditions  one  may  discern  real  possibilities 
of  a  long  period  of  gradual  decline  in  economic  and  social 
well-being — a  slipping  back  to  the  conditions  of  a  century  or 
more  ago. 

Even  Russia  will  survive.  Many  millions  of  people  will 
continue  to  live  in  those  vast  agricultural  steppes  of  eastern 
Europe,  whatever  may  be  the  fate  of  Russian  industrial  life. 
But  some  millions  of  Russian  city  folk  have  already  perished 
and  Russian  agriculture  is  rapidly  reverting  to  the  stage  of 
hoe  culture.  It  is  not  at  all  beyond  the  bounds  of  possibility 
that  all  of  continental  Europe  might  in  the  course  of  the  next 
twenty-five  years,  or  even  sooner,  go  the  way  that  Russia 
has  already  gone.  It  would  not  necessarily  be  through  the 
instrumentality  of  bolshevism;  it  might  as  easily  be  in  the 
Austrian  way.  But  in  any  case  it  would  mean  a  great  de- 
crease in  urban  population,  through  starvation  and  migra- 
tion, mainly  the  former;  and  it  would  involve  great 
reductions  in  living  standards  even  for  the  agricultural 
communities. 

This  dire  consummation  may  occur.    Indeed,  it  is  not  at 


ECONOMIC  AND  SOCIAL  DISINTEGRATION  139 

all  unlikely  that  it  will  occur,  unless  the  statesmen  of  the 
world — both  political  and  industrial — unite  in  some  compre- 
hensive program  of  international  economic  reconstruction. 
We  have  faith  to  believe  that  it  need  not  happen  if  the  sense- 
less optimism  and  narrow  provincialism  that  has  stood  ever 
since  the  Armistice  as  a  bar  to  the  formulation  of  a  construc- 
tive policy,  be  supplanted  by  an  intelligent  appreciation  of  the 
real  gravity  of  the  situation,  and  a  statesmanlike  recognition 
in  each  country  of  the  necessity  of  viewing  the  problem  as 
essentially  an  international  one. 


CHAPTER  XI 

THE  UNITY  OF  THE  PROBLEM 

Europe  an  Economic  Unit 

In  the  foregoing  analysis  of  the  fundamental  elements 
in  the  European  economic  situation,  little  detailed  attention 
was  given  to  conditions  in  each  of  the  several  countries. 
With  the  exception  of  the  chapter  dealing  with  the  German 
monetary  collapse,  the  analysis  was,  in  the  main,  centered 
upon  the  various  gauges  or  indexes  of  European  conditions 
in  general;  and  data  were  drawn  from  particular  countries 
only  for  the  purpose  of  illustrating  the  principles  or  condi- 
tions under  consideration.  No  attempt  was  made  to  discuss 
the  Italian  or  the  French  or  the  Belgian  or  the  British  situa- 
tion, in  great  detail  and  in  all  its  aspects,  with  a  view  to 
demonstrating  that  this,  that,  or  the  other  particular  country 
— by  itself — is  at  this  particular  time  either  improving  or 
retrogressing. 

While  there  are  undoubtedly  marked  differences  in  the 
general  economic  status  of  the  various  countries  at  any 
given  time ;  indeed,  while  the  nations  of  Europe,  as  we  have 
seen,  may  be  classified  into  three  or  four  groups  representing 
varying  degrees  of  economic  decadence — with  Russia  and 
Austria  at  one  extreme  and  England  and  the  neutrals  at  the 
other — there  is  little  to  be  gained  by  making  a  detailed  an- 
alysis of  monetary  conditions  in  each  individual  country.  It 
is  only  the  European  economic  organization  as  a  whole  that 
is  important.  Europe  is  an  economic  unit,  and  all  nations 
will  in  the  end  improve  or  relapse  together.  Because  of 
peculiar  conditions,  some  countries  will  suffer  more  than 

140 


UNITY  OP  THE  PROBLEM  I4I 

others  in  the  event  of  a  long  period  of  economic  and  social 
retrogression ;  but  by  and  large,  all  are  in  the  same  boat. 

If  Poland,  Finland,  Hungary,  Czechoslovakia,  and  the 
Balkans  continue  to  travel,  as  they  are  now  traveling,  the 
route  that  Austria,  as  well  as  Russia,  has  already  taken,  it 
is  difficult  to  see  how  German  trade  and  industry,  which  are 
so  largely  dependent  upon  eastern  European  markets,  can 
escape  serious  depression.  And  if  Germany,  because  of  this, 
in  conjunction  with  the  stupendous  difficulties  to  which  she 
has — in  her  own  right — fallen  heir,  goes  the  way  of  the  other 
countries  of  central  and  eastern  Europe,  the  consequences 
upon  both  neutral  and  Allied  economic — and  political — life 
will  be  extremely  grave. 

Economic  Pivot  of  Europe 

Modern  Germany — the  industrial  Germany  that  was 
founded  with  the  empire  in  the  decade  of  the  seventies — is 
the  economic  pivot  of  continental  Europe.  The  evolution  of 
the  vast  financial  and  economic  organization  of  Germany 
during  the  last  quarter  of  the  nineteenth  century  and  the 
early  years  of  the  twentieth — however  disastrous  the  accom- 
panying political  developments — was  primarily  responsible 
for  the  remarkable  economic  progress  during  this  period  in 
all  continental  Europe. 

In  the  first  place,  the  development  of  German  industrial- 
ism alone  made  possible  the  phenomenal  growth  of  popula- 
tion, within  the  confines  of  the  empire,  from  40  millions  in 
1870  to  68  millions  in  1914 — a  growth  of  population,  more- 
over, that  was  accompanied  by  a  steadily  rising  standard  of 
living.  What  this  increase  of  population  and  of  purchasing 
power  meant  to  neutral  and  Allied  nations  cannot  well  be 
overemphasized.  Before  1870,  Germany  was  a  poor  agricul- 
tural nation,  largely  self-contained.  Then,  within  a  single 
generation  Germany  became  a  land  of  affluence,  and  a  major 


142  THE  SITUATION  AS  IT  REALLY  IS 

purchaser  of  Italian,  French,  Belgian,  Dutch,  Scandinavian, 
British,  and  American  exports.  German  industrial  life  was 
so  organized  that  a  large  percentage  of  the  raw  materials 
required  for  her  industries  were  imported ;  and  she  was  also 
a  large  importer  of  finished  commodities,  particularly  of 
luxuries  produced  by  Italy,  France,  and  Belgium. 

While  Germany,  as  a  matter  of  course,  exported  finished 
commodities  to  the  nations  of  eastern  and  southeastern 
Europe  and  also  to  the  industrial  nations  of  the  west, 
German  prosperity  was,  nevertheless,  of  the  greatest  benefit 
to  other  industrial  nations.  German  exports,  which  protec- 
tionists so  violently  denounced,  afforded  Germany  the  means 
with  which  to  buy  the  commodities  she  imported  from  other 
nations.  Both  Germany  and  other  industrial  nations  throve 
because  of  specialized  production  and  exchange.  The  inter- 
national trade — with  emphasis  on  the  trade — ^that  developed 
between  other  nations  and  the  puissant  Germany  of  the 
generation  before  the  war  was  mutually  beneficial. 

Financial  Germany 

In  the  second  place,  the  development  of  financial  Ger- 
many was  the  principal  factor  in  increasing  population  and 
productive  efficiency  throughout  all  of  Europe  east  of  the 
Rhine.  Germany,  with  Austria,  financed  the  major  part  of 
the  economic  development  that  occurred  in  eastern  and  south- 
eastern Europe  in  the  latter  years  before  the  war.  The. 
economic  life  of  this  vast  territory  radiated  from  the  finan- 
cial offices  of  Berlin,  Hamburg,  Frankfort,  and  Vienna. 
One  of  the  most  interesting  chapters  in  the  whole  history  of 
economic  evolution  is  found  in  the  remarkable  union 
between  German  finance  and  German  industry,  both  at 
home  and  in  surrounding  countries,  that  was  developed  in 
the  heyday  of  the  empire.  We  are  not  here  concerned,  let 
it  be  repeated,  with  the  political  consequences  of  this  de- 


UNITY  OF  THE  PROBLEM  143 

velopment.  We'  are  for  the  present  interested  only  in  its 
relation  to  the  economic  prosperity  of  Europe  during  the 
period  when  it  flourished. 

It  was  not  alone  through  finance,  moreover,  that 
Germany  organized,  controlled,  and  developed  the  economic 
system  of  central  and  eastern  Europe.  German  shipping 
and  German  commercial  organization  were  almost  as  im- 
portant. As  the  geographical  heart  of  the  continent, 
Germany  was  peculiarly  favored  in  her  development  of  the 
shipping  lines  and  commercial  connections  with  which 
before  the  war  she  directed  the  commerce  of  nearly  the 
whole  of  central  and  eastern  Europe  to  the  borders  of 
Asia. 

To  those  who,  still  under  the  influence  of  war  psy- 
chology, look  for  the  re-establishment  of  European  security 
and  prosperity  through  the  destruction  of  Germany,  the 
answer  is  that  such  a  process  would  inevitably  spread  its 
devastating  effects  throughout  all  Europe.  It  cannot  be  too 
strongly  emphasized  that  the  purchasing  power  of  Germany, 
and  througli  Germany  the  purchasing  power  of  all  central 
and  eastern  Europe,  is  essential  not  only  to  the  prosperity  of 
western  Europe;  one  may  almost  say  it  is  essential  to  the 
perpetuity  of  the  industrial  life  of  highly  developed  nations 
such  as  England. 

Interdependence  of  Economic  World 

We  have  thus  far  spoken  only  of  the  effects  of  the 
economic  disintegration  of  eastern  and  central  Europe  upon 
the  nations  of  western  Europe.  It  remains  to  consider  the 
probable  reaction  of  a  catastrophe,  such  as  has  been  fore- 
shadowed, upon  American  economic  life.  While  intelligent 
people  everywhere  now  assent  to  the  doctrine  that  the 
modern  economic  world  is  essentially  interdependent,  with 
the  many  such  assent  is  only  lip  service;  relatively  few 


144  THE  SITUATION  AS  IT  REALLY  IS 

fully  appreciate  how  intricately  interwoven  is  the  economic 
life  of  modern  nations. 

Some  vague  notion  of  the  close  nexus  of  international 
financial  relations  may  be  gained  from  considerations  such 
as  the  following :  When  the  great  speculative  mania  in  the 
Argentine  in  the  decade  of  the  eighties,  accompanied  by  the 
issue  of  vast  quantities  of  irredeemable  paper  currency, 
collapsed  in  1890,  it  resulted  in  the  failure  of  Baring  Broth- 
ers, one  of  the  greatest  international  banking  houses  of 
England,  all  but  precipitated  a  general  financial  panic  in 
Europe,  and  led  to  a  very  serious  unsettling  of  American 
financial  conditions.  Similarly,  financial  difficulties  in  Japan 
and  Egypt  in  1906  contributed  to  the  forces  that  were  bring- 
ing on  the  American  panic  of  1907,  while  the  repercussions 
of  this  panic  in  the  United  States  were  felt  in  every  market 
of  the  world.  For  example,  it  was  felt  severely  in  the  cara- 
van trade  from  central  Africa  across  the  Sahara  desert  to 
Tripoli.  Every  period  of  prosperity  of  modern  times  has 
sooner  or  later  spread  throughout  the  entire  world;  and 
every  important  period  of  liquidation,  wherever  beginning, 
has  in  the  end  made  itself  felt  in  every  nation.  The  present 
"world-wide"  depression,  for  example,  began  in  Japan;  it 
spread  to  the  United  States,  to  South  America,  to  Central 
America,  to  Europe,  to  Australia,  to  Egypt,  to  India,  to 
Cape  Colony,  to  Siam,  There  is  not  a  spot  on  the  globe  that 
is  within  the  field  of  commercial  civilization  that  has  not 
felt  severely  the  effects  of  the  post-war  liquidation. 

American  Dependence  on  Foreign  Trade 

These  are,  however,  only  general  statements.  Specific 
data  are  required  to  reveal  to  the  uninitiated  how  closely 
interrelated  is  the  economic  life  of  modem  nations.  The 
following  statement  taken  from  one  of  the  publications  of 
the  Guaranty  Trust  Company  of  New  York,  based-  upon 


UNITY  OF  THE  PROBLEM  145 

practical  trade  information  coming  into  the  bank,  indicates 
in  some  detail  the  nature  of  the  dependence  of  trade  between 
the  United  States  and  foreign  lands  since  the  war. 

"Danville,  Va.,  is  interested  in  sending  tobacco  to 
Venezuela;  La  Porte,  Ind.,  wants  to  send  farm  tractors  to 
Brazil;  St.  Joseph,  Mich.,  desires  an  agent  for  automobile 
accessories  in  India;  Durgettstown,  Pa.,  sends  an  inquiry 
regarding  industrial  enterprises  in  Jugoslavia ;  Parkersburg, 
W.  Va.,  wants  to  sell  oil  well  supplies  to  Mexico;  Keokuk, 
Iowa,  is  interested  in  developing  a  market  for  rolled  oats  in 
South  America;  Coshocton,  Ohio,  wants  to  appoint  an 
agent  in  Spain  for  its  glass  bottles;  Cadillac,  Mich.,  desires 
to  ship  veneer  to  New  Zealand;  Monessen,  Pa.,  is  interested 
in  steel  wire  in  South  Africa;  Charlotte,  N.  C,  wants  to 
send  cotton  to  Finland;  Norfolk  Downs,  Mass.,  has  a 
customer  for  weighing  machinery  in  Formosa;  Mount 
Pleasant,  Mich.,  has  a  customer  for  trucks  in  Guatemala; 
and  Valdosta,  Ga.,  wants  to  export  cotton  linters  to 
Czechoslovakia. 

"A  recent  analysis  of  the  cargo  carried  by  a  United 
Fruit  liner  sailing  from  New  Orleans  to  South  American 
ports  showed  that  practically  every  community  in  the  United 
States,  manufacturing  or  agricultural,  had  some  part  in 
the  production  of  the  cargo  sent  out  in  this  steamer." 

Nor  is  the  United  States  interested  merely  in  exports. 
The  statement  goes  on  to  say : 

"In  order  to  provide  a  sustained  market  for  our  surplus 
manufactures,  we  must  have  a  regular  and  increasing  supply 
of  many  commodities  which  are  not  produced  in  the  United 
States,  or  which  are  produced  in  such  small  volume  as  to  be 
entirely  inadequate  for  our  requirements.  We  must  obtain 
manganese  for  our  steel  mills  from  Russia  and  South 
America.  Our  tanneries  must  have  quebracho  from  Ar- 
gentina ;  our  automobile  tire  industry  must  obtain  crude  rub- 


146  THE  SITUATION  AS  IT  REALLY  IS 

ber  from  Brazil;  our  machine  shops,  rail  mills,  armored 
plate  works,  and  wire  rope  factories  must  have  nickel  from 
Canada  and  New  Caledonia;  our  tinplate  manufacturers 
must  import  their  tin  from  the  Malay  Straits  and  from 
Bolivia;  our  silk  factories  must  get  their  raw  product  from 
China  and  Japan;  our  clothing  wools  must  be  imported 
from  Australia  and  Argentina;  our  manufacturers  of 
twines,  canvas,  linens,  and  laces  must  get  their  flax  from 
Russia  and  Belgium;  our  burlap  makers  must  get  their  jute 
from  India ;  the  sisal  which  is  used  to  make  our  binder  twine, 
which  is  so  essential  in  the  harvesting  of  our  crops,  must 
come  from  Yucatan.  We  must  also  import  large  quantities 
of  cocoanut  oil  and  other  vegetable  oils  from  the  Dutch 
East  Indies  and  from  the  Pacific  isles;  coffee  from  Brazil, 
tea  from  China,  India,  Japan,  and  Java;  cocoa  from  Vene- 
zuela; sugar  from  Cuba;  rice  from  the  Far  East;  spices 
from  the  East  Indies;  platinum  from  Colombia;  and 
vanadium  from  Peru." 

The  following  statement  by  the  president  of  one  of  our 
greatest  banks,  suggests  in  concrete  fashion  the  effects  of  the 
decline  ki  European  purchasing  during  the  past  year  upon 
American  economic  conditions. 

"The  reactions  here  of  economic  disturbances  in  Europe 
are  beginning  to  manifest  themselves  so  plainly  that  every 
element  of  our  body  politic — the  business  man,  the  banker, 
the  manufacturer,  the  farmer  and  the  laborer — cannot  fail 
to  see  and  feel  them.  The  most  patent  and  perturbing 
evidence  of  those  reactions  is  the  present  unemployment  in 
the  United  States,  unquestionably  due  in  considerable  degree 
to  world-wide  conditions. 

"Almost  half  of  the  country's  record  corn  crop  of  last 
year  remained  on  the  farms  on  March  i ,  more  than  a  quarter 
of  the  wheat  crop,  and  almost  half  of  the  large  crop  of  oats. 
There  is  about  a  two  years'  supply  of  tobacco  and  wool  on 


UNITY  OF  THE  PROBLEM  147 

hand.  The  bituminous  coal  industry  is  developed  far  beyond 
present  or  immediate  future  demands  of  domestic  trade. 
The  automobile  trade  is  oversupplied  with  cars.  There  are 
indications  of  an  oversupply  of  zinc,  shoes,  and  manufac- 
tures of  leather. 

"The  surplus  copper,  raw  and  refined,  in  this  country,  is 
estimated  at  more  than  1,000,000,000  pounds.  Europe 
formerly  took  about  half  of  our  copper,  and  the  world 
depends  upon  the  mines,  refineries,  and  smelters  of  the 
United  States  for  its  copper.  Yet,  despite  our  enormous 
surplus,  the  whole  world  has  not  been  so  badly  in  need  of 
copper  in  years  as  it  is  today.  Lack  of  credit  alone  has 
been  responsible  for  the  piling  up  of  that  surplus  of  the  red 
metal. 

"In  one  middle  west  state  manufacturers  face  a  loss  of 
$20,000,000  in  current  export  orders  from  southeastern 
Europe  alone.  Flour  millers  have  inquiries  for  large  ship- 
ments to  Poland  and  Czechoslovakia,  where  the  prospective 
purchasers  are  eager  to  put  up  sugar  certificates  and  govern- 
ment bonds  for  six  months'  credit.  Prospective  Roumanian 
purchasers  offer  government  bonds,  oil  certificates,  and  cash. 
Scandinavian  seekers  of  American  electrical  machinery  have 
offered  tax  warrants  as  collateral  for  long-term  credit 
arrangements.  Egyptian  importers  are  in  the  market  for 
almost  every  manufactured  article  produced  in  the  United 
States — particularly  American  specialities,  such  as  type- 
writers, sewing  machines,  automobiles,  etc.  Shipments  of 
coal  to  South  America  amounting  to  hundreds  of  thousands 
of  dollars  are  being  held  up  because  the  South  American 
buyers  cannot  arrange  dollar  credits  in  New  York." 

American  Agriculture  and  Foreign  Markets 

Notwithstanding  such  facts  as  these  and  in  spite  of  all 
the  emphasis  that  has  been  placed  by  bankers  and  others 


148  THE  SITUATION  AS  IT  REALLY  IS 

Upon  the  necessity  of  maintaining  our  export  trade  if  the 
country  is  to  prosper,  one  hears  men  say  on  every  hand  that 
whatever  happens  in  Europe  this  great  country  of  ours  v^rill 
not  be  seriously  affected.  Let  our  foreign  markets  go,  if 
need  be.  It  is  urged  that  they  are  relatively  unimportant 
anyhow;  for  our  foreign  trade  is  only  lo  per  cent — or  is  it 
5  per  cent — of  our  total  trade.  Rather  than  grieve  over  the 
loss  of  foreign  markets,  let  us  confidently  devote  our  atten- 
tion to  developing  our  home  markets.  Is  not  the  consuming 
capacity  of  the  American  people  limitless  in  extent?  Think 
of  the  enormous  numbers  of  people  who  still  have  no  auto- 
mobiles ;  think  of  the  number  whose  homes  are  not  elegantly 
furnished;  think  of  the  number,  if  one  must,  who  are  still 
scarcely  above  the  minimum  of  subsistence.  Why  worry 
about  foreign  markets  when  such  vast  potential  demands  are 
to  be  found  within  our  own  borders  ? 

Brave  words  these;  but  based  upon  fundamental  mis- 
conceptions of  the  working  of  economic  forces.  Large  and 
thriving  domestic  markets,  unfortunately,  depend  upon 
foreign  markets;  they  cannot  readily  be  stimulated  wlien 
foreign  markets  are  waning.  Moreover,  it  is  altogether  mis- 
leading to  argue  that  since  our  export  trade  as  a  whole  con- 
stitutes only  5  or  lo  per  cent  of  our  total  trade,  it  is  relatively 
unimportant.  The  truth  of  the  matter  is  that  practically 
50  per  cent  of  our  total  cotton  supply  is  normally  exported, 
and  from  25  to  30  per  cent  of  our  wheat  crop.  In  many 
lines  of  industry  our  exports  are  altogether  negligible; 
while  in  certain  other  important  industries  the  export  trade 
is  of  paramount  significance.  While  one  might  argue  with 
a  show  of  plausibility  that  a  5  per  cent  loss  of  trade  is  not 
significant,  he  cannot  argue  with  equal  cogency  when  the 
percentage  that  is  involved  is  20  or  30  or  even  50,  as  in  the 
case  of  cotton. 

There  is  no  escape  from  the  conclusion  that  if  American 


UNITY  OF  THE  PROBLEM  I49 

exports  of  cotton  and  wheat  should  be  very  greatly  reduced 
as  a  result  of  European  decadence,  the  cotton  belt  and  the 
wheat  belt  would  be  seriously  depressed  for  years  to  come. 
In  this  connection,  it  would  be  well  to  remember  that  the 
present  depressed  condition  in  the  South  and  in  the  grain- 
growing  regions  of  the  West  exists  in  spite  of  the  relatively 
good  European  demand  for  cotton  and  wheat. 

Effect  on  Domestic  Trade 

It  is  idle  to  hope  that  our  manufacturing  industries — if 
shorn  of  their  foreign  markets — could,  under  the  conditions 
prevailing,  immediately  devote  their  attention  to  the  manu- 
facture of  goods  for  sale  to  the  people  of  the  cotton  districts 
and  to  the  wheat  farmers  of  the  West.  Cotton  and  grain 
growers  can  purchase  the  products  of  domestic  manufacture 
only  when  a  strong  foreign  demand  affords  them  a  paying 
price  for  their  products.  And  under  a  profit-making  system 
manufactures  will  produce  goods  for  sale  to  farmers,  or 
anyone  else,  only  when  it  pays  to  do  so. 

During  the  war  period,  in  consequence  of  the  inordinate 
foreign  demands  for  American  raw  materials  and  food- 
stuffs, producers  of  cotton  and  food  enjoyed  unprecedented 
prosperity;  whereupon  they  proceeded  to  purchase,  with  an 
abandon  never  before  equaled,  the  produce  of  American 
manufacture.  The  expanded  domestic  demand  was  definitely 
a  result  of  the  large  foreign  demand.  The  tide  has  now  been 
reversed;  and  we  shall  not  be  able  to  expand  materially  our 
domestic  sales  in  the  agricultural  regions  of  the  South  and 
West  so  long  as  the  foreign  demand  for  their  produce  con- 
tinues to  decline. 

The  point  of  this  analysis  is  that  since  a  decline  in 
foreign  demand  may  cause  economic  prostration  in  certain 
basic  industries  in  the  United  States  and  since  the  effects  of 
this  are  felt  throughout  the  entire  industrial  system  of  the 


150  THE  SITUATION  AS  IT  REALLY  IS 

country,  the  loss  of  our  foreign  trade  is  of  vital  importance. 
A  decline  of  foreign  trade  carries  with  it,  for  at  least  a  con- 
siderable period  of  time,  a  decline  in  domestic  trade. 

The  qualification,  "for  at  least  a  considerable  period  of 
time,"  will  be  noted.  The  North  American  continent  is 
economically  self-sufficient;  and  it  is  large  enough  and  diver- 
sified enough  to  permit  an  extensive  geographical  specializa- 
tion in  production.  In  the  long  run  we  might,  therefore, 
effect  a  vast  reorganization  of  the  channels  of  trade  and  of 
financial  relations,  and  get  on  well  enough  without  Europe. 
The  trouble  is  that  we  are  just  now  faced  with  the  short  run, 
which  must  be  completed  before  we  shall  have  an  oppor- 
tunity to  engage  in  the  longer  jaunt.  Our  economic 
organization  is  adjusted,  as  a  result  of  the  trade  and  indus- 
trial evolution  of  the  last  hundred  years,  to  trade  with 
Europe.  The  process  of  reorganizing  the  industrial  system 
on  wholly  independent  lines  would  involve  the  gravest  in- 
dustrial consequences  and  require  many  years  to  accomplish. 

Again  we  must  come  back  to  the  question  of  imports. 
If  the  power  of  European  nations  to  produce  commodities 
required  by  the  United  States  is  seriously  impaired,  this  will 
carry  with  it  not  merely  a  reduction  in  European  ability  to 
buy  goods  from  us,  but  it  will  in  many  cases  seriously 
hamper  American  industries  as  well.  Run  back  over  the  list 
of  commodities  mentioned  in  the  quotation  above  that  must 
be  imported  by  the  United  States,  and  you  will  find  that  the 
maintenance  of  imports  is  quite  as  essential  to  American 
prosperity  as  the  maintenance  of  exports.  The  maintenance 
of  trade,  whereby  the  modern  system  of  specialized  produc- 
tion is  made  possible,  is  the  vitally  important  requirement. 

General  Debacle  and  Industrial  Nations 

All  nations,  then — even  the  United  States — will  have  to 
bear  the  industrial  consequences  if  the  process  of  economic 


UNITY  OF  THE  PROBLEM  I5I 

and  social  disintegration  in  central  and  eastern  Europe  is 
allowed  to  run  its  fatal  course.  It  remains  to  inquire  what 
nations  might  be  expected  to  suffer  most  heavily  from  the 
effects  of  such  a  catastrophe.  As  was  indicated  in  the 
previous  chapter,  a  complete  financial  and  economic  collapse 
in  Europe  does  not  imply  the  utter  annihilation  of  peoples 
and  nations  there.  All  nations,  even  Russia,  will  somehow 
survive,  although  with  greatly  decimated  and  impoverished 
populations.  It  is  a  reasonably  safe  prediction,  however, 
that  the  nations  that  are  primarily  agricultural  would  suffer 
least  and  recover  most  quickly.  The  great  industrial  nations 
with  their  teeming  urban  populations,  such  as  Germany  and 
Great  Britain,  would  suffer  most.  The  United  States  is  in 
a  separate  category,  partly  because  of  our  geographical  posi- 
tion and  partly  because  of  the  importance  of  American 
agriculture.  Interestingly  enough,  Great  Britain,  although 
still  in  much  the  strongest  position  of  any  European  bel- 
ligerent, would  doubtless  suffer  more  than  any  other  country 
in  the  event  of  a  general  debacle,  because  there  the  delicately 
adjusted  complex  industrial  organization  of  the  present  age 
finds  its  most  complete  exemplification,  and  because  there 
agriculture  is  of  negligible  importance. 

The  highly  developed  industrial  nations  would  suffer 
most,  for  the  reason  that  in  such  countries  the  largest  per- 
centage of  the  population  is  dependent  for  the  means  of 
existence  upon  the  smooth  functioning  of  the  delicate 
machinery  of  international  trade  and  finance.  For  example, 
let  British  exports  of  coal  and  of  manufactured  commodities 
to  the  continent  of  Europe  practically  cease  for  a  single  year 
and  the  major  portion  of  British  industry  would  be  pros- 
trated, with  something  like  half  the  population  of  the  islands 
without  means  of  subsistence.  Such  a  crisis  would,  of 
course,  quickly  threaten  social  and  political  revolution;  for 
men  without  bread,  as  recent  riots  in  England  indicate,  will 


152  THE  SITUATION  AS  IT  REALLY  IS 

not  lon^  refrain  from  resorting  to  extreme  measures  for 
relief. 

Better  Position  of  Agricultural  Countries 

Dominantly  agricultural  nations  would  suffer  less  than 
industrial  countries,  for  the  reason  that  they  are  not  quite 
so  vitally  dependent  upon  the  successful  working  of  the 
international  economic  organization,  A  much  bigger  per- 
centage of  the  population  would  still  have  access  to  the 
sources  of  food  supply.  For  the  same  reason,  political  and 
social  upheaval  would  there  be  less  likely  than  in  the  urban 
deserts  of  industrial  nations. 

The  conclusion  is  quite  unwarranted,  however,  that 
agricultural  nations  would  sufifer  but  little.  We  have 
already  referred  to  the  probable  effects  of  a  collapse  of  the 
European  demand  for  American  cotton  and  wheat  upon  the 
economic  well-being  of  the  agricultural  populations  con- 
cerned. We  may  now  refer  to  the  consequences  of  the 
disintegration  of  Russian  industry — unimportant  as  it  was 
— upon  Russian  agricultural  life.  Russia  has  already 
become,  to  all  intents  and  purposes,  an  assemblage  of  isolated 
agricultural  communities,  reduced  to  the  stage  of  hoe  culture, 
eking  out  a  pitiable  existence  by  the  process  of  direct 
appropriation  of  natural  resources.  If  it  be  replied  that 
agricultural  Russia  was  never  far  advanced  in  the  scale  of 
civilization,  the  answer  is  that  even  so  there  has  been  a 
disastrous  decadence.  A  Russian  famine  such  as  that  of 
the  present  year  would  not  have  been  possible  before  the 
war. 

The  truth  is  that  agriculture  is  dependent  upon  industry, 
even  as  industry  is  dependent  upon  agriculture.  The  growth 
of  agricultural  population,  the  intensive  development  of  old 
agricultural  areas,  and  the  extensive  development  of  new 
ones  that  has  occurred  during  the  last  century,  have  been 


UNITY  OF  THE  PROBLEM  153 

made  possible  only  by  the  growth  of  great  urban  populations 
and  the  huge  industrial  output  that  accompanied  the  evolu- 
tion of  the  modern  industrial  system.  If  the  complex  in- 
dustrial organization  of  the  present  day  is  destroyed,  or 
merely  set  back  for  a  generation  or  so,  in  consequence  of  the 
working  of  the  economic  forces  which  we  have  been  con- 
sidering, it  will  be  impossible  for  the  agricultural  prosperity 
that  accompanied  the  rise  of  the  industrial  system  to  hold 
its  present  position.  If  the  modern  financial  and  industrial 
organization  disintegrates,  agriculture  everywhere  will 
inevitably  revert  at  least  to  the  conditions  that  obtained  at 
the  middle  of  the  last  century. 

We  have  sought  to  establish  in  this  chapter  that  the 
modern  world  is  an  economic  unit,  and  that  no  part  of  it  can 
prosper  when  other  important  portions  are  in  decadence. 
That  central  as  well  as  eastern  Europe  is  foredoomed  to 
collapse,  was  not,  however,  conclusively  demonstrated  in 
preceding  chapters.  The  presumption  merely  was  estab- 
lished, and  this  only  in  the  event  that  effective  remedial 
measures  are  not  adopted.  We  must,  however,  still  postpone 
the  consideration  of  remedies.  For  the  possibility  of  a 
European  recovery  is  closely  associated  with  the  task  of 
maintaining  international  peace;  and  the  task  of  maintain- 
ing international  peace  is  unfortunately  still  intimately  con- 
nected with  the  problem  of  German  reparations.  Notwith- 
standing the  reparations  "settlement"  that  was  finally 
effected  in  May,  1921,  we  shall  find  that  reparations  is  as 
unsettled  a  question  as  ever.  Part  II  of  this  volume  will  be 
devoted  to  a  discussion  of  the  reparations  dilemma. 


Part  II — The  Reparations  Dilemma 


CHAPTER  XII 

HISTORY  OF  THE  REPARATIONS 
CONTROVERSY 

The  Central  Political  Issue 

The  reparations  issue,  from  the  very  elements  which 
compose  it,  must  continue  to  be  the  storm  center  of 
European  politics.  The  payments  to  be  made  by  Germany 
cover  a  long  period  of  years.  If  Germany  is  to  pay,  she 
must  develop  (as  will  be  shown  in  succeeding  chapters)  an 
excess  of  exports  over  imports  oh  a  scale  never  attained 
hitherto  by  any  nation,  save  under  the  stimulus  of  huge  war 
demands.  The  burden  of  expanding  exports  in  unprece- 
dented fashion  is,  moreover,  laid  upon  Germany  at  a  singu- 
larly unfavorable  time;  for  the  freedom  of  commercial 
intercourse  and  equality  of  trade  opportunity  urged  by 
President  Wilson  in  his  fourteen  points  has  given  way  to  a 
protectionist  sentiment  and  a  policy  of  trade  restriction  that 
finds  no  parallel  since  the  "mercantilist"  era  of  the  seven- 
teenth and  eighteenth  centuries. 

There  is  foreshadowed,  therefore,  in  the  world  situation, 
the  probability  that  Germany  will  constantly  be,  to  a  lesser  or 
greater  degree,  in  default  on  her  reparations  payments.  The 
reparations  question  will  continue  to  be  the  outstanding 
political  issue  in  each  nation  which  has  money  to  receive  or 
to  pay  on  reparation  account.  This  conclusion  is  inescapable, 
in  view  of  the  debt  and  budget  situation  in  each  of  the  Allied 

155 


156  THE  REPARATIONS  DILEMMA 

countries  and  in  Germany,  as  outlined  in  previous  chapters. 
The  mounting  burden  of  debts  and  taxation  in  such  coun- 
tries as  France  and  Belgium  will  seem  to  make  the  continued 
payment  of  German  reparations  vital  to  their  solvency.  At 
the  same  time  the  mounting  burden  of  debt  in  Germany  and 
the  threatening  collapse  of  the  whole  financial  system  will 
make  reparations  the  central  political  issue  there. 

A  brief  history  of  the  reparations  controversy  to  date 
will  reveal  the  underlying  forces  which  will  control  the 
political  history  of  Europe  for  the  next  generation.  For 
these  reasons  we  have  considered  that  a  detailed  analysis  of 
what  may  best  be  described  as  the  reparations  dilemma  is 
necessary  to  an  understanding  of  the  economic  and  political 
future  of  Europe.  Since  the  problem  is  an  intricate  one 
we  have  divided  the  discussion  into  a  number  of  chapters. 

Procedure  of  Discussion 

The  reparations  issue  has  passed  through  various  stages 
since  it  first  arose  in  connection  with  the  discussion  of  the 
Armistice.  A  preliminary  chapter  on  the  history  of  the 
reparations  controversy  is,  therefore,  required  as  a  back- 
ground for  a  study  of  the  fundamental  issues  involved.  The 
present  chapter  serves  that  purpose.  Here  we  do  not  enter 
into  controversial  discussions,  but  confine  ourselves  to  a 
plain  statement  of  the  facts  up  to  the  * 'final  settlement"  of 
May,  1921. 

The  next  chapter  is  devoted  to  a  consideration  of  the 
much  discussed  question  of  German  ability,  or  capacity,  to 
pay  the  sums  demanded  by  the  Allies. 

Chapter  XIV  takes  up  the  question  of  Allied  willing- 
ness to  receive  from  Germany  the  goods  and  commodities 
with  which  alone  Germany  can  pay.  It  will  be  shown  that 
while,  on  the  one  hand,  the  Allied  nations  are  demanding 
huge  reparations  payments  from  Germany  under  the  threat 


REPARATIONS  CONTROVERSY  157 

of  further  military  occupation ;  on  the  other  hand,  under  the 
pressure  of  their  own  industrialists,  they  are  developing 
economic  policies  which  render  it  practically  impossible  for 
Germany  to  pay. 

Chapter  XV  is  devoted  to  a  discussion  of  the  economic 
effects  of  reparation  payments  upon  the  nations  receiving 
them  and  upon  the  nations  paying  them. 

Chapter  XVI  explains  the  new  phase  of  the  reparations 
question  that  has  developed  during  the  summer  of  1921.  We 
refer  to  the  so-called  rapprochement  between  France  and 
Germany,  whereby  it  appears  that  a  considerable  portion  of 
the  French  share  of  the  reparation  payments  are  now  to  be 
received  in  the  form  of  materials  for  reconstruction. 

Chapters  XVII  and  XVIII  will  attempt  to  outline  the 
political  angles  of  the  reparations  question,  and  to  depict,  so 
far  as  the  chaotic  situation  will  permit,  the  major  factors 
which  now  make  up  the  European  political  situation. 

Preliminary  Terms 

The  first  attempt  to  formulate  officially  the  terms  of  the 
reparations  payments  which  Germany  was  to  make  under  the 
Treaty  of  Peace,  came  before  the  Armistice.  A  series  of 
diplomatic  notes  were  exchanged  between  Germany  and  the 
United  States  and  Allied  governments.  It  was  in  October, 
1 918,  that  the  German  government  asked  President  Wilson 
whether  the  Allied  and  Associate  Powers  were  willing  to 
make  peace  on  the  basis  of  the  President's  fourteen  points 
and  his  other  public  utterances,  in  which  were  set  forth  the 
war  aims  of  the  President.  There  was  one  declaration  in 
these  war  aims  which  concerned  payments  to  be  made  by 
Germany.  This  declaration  stated  that  "invaded  territories 
must  be  restored  as  well  as  evacuated  and  freed."  * 


^President's  note  to  German  government,  November  5,  1918. 


158  THE  REPARATIONS  DILEMMA 

President  Wilson  communicated  the  German  note  to  the 
Allied  governments  and  asked  whether  they  were  willing  to 
make  peace  on  this  basis.  The  Allied  governments,  after 
consultation,  answered  in  a  joint  note  that  they  would  agree 
to  make  peace  on  the  basis  indicated,  with  certain  exceptions 
noted.  One  of  these  exceptions  was  on  the  point  in  the 
Wilson  declaration  that  "invaded  territories  must  be  re- 
stored as  well  as  evacuated  and  made  free."  The  Allied 
governments  intimated  that  this  statement  was  not  definite 
enough,  and,  to  make  clear  their  meaning,  they  used  the 
following  expression:  "By  it  they  (the  Allied  govern- 
ments) understand  that  compensation  will  be  made  by 
Germany  for  all  damage  done  to  the  civilian  population  of 
the  Allies  and  their  property  by  the  aggression  of  Germany 
by  land,  by  sea,  and  from  the  air."  ^  The  agreement  between 
the  executives  of  enemy  and  Allied  countries  was  completed 
when  President  Wilson  communicated  the  fact  to  the 
German  government  that  the  Allied  and  Associate  Powers 
would  make  peace  on  the  terms  specified,  including  the  ex- 
ceptions designated. 

The  Armistice  Provision 

The  Armistice  followed,  the  terms  of  which  were  dictated 
by  the  United  Command.  The  terms  of  the  Armistice  con- 
cerned themselves  principally  with  the  military  measures 
necessary  to  make  Germany  incapable  of  renewing  hostilities 
in  case  the  subsequent  peace  negotiations  failed.  There 
was,  however,  inserted  in  the  Armistice  agreement  a  clause, 
the  authority  of  which  is  accredited  by  Tardieu  to  M.  Klotz, 
French  Minister  of  Finance,  which  concerned  reparations. 
This  ambiguous  clause  required  that  Germany  must  pay 
reparations  for  damage  done,  with  the  reservation  that  "any 


*  Quoted   by    President   Wilson   in   Note   to   German   government, 
November  5,  1918. 


REPARATIONS  CONTROVERSY  159 

subsequent  claims  of  the  Allies  and  the  United  States  re- 
main unaffected."  It  will  be  seen  that  "subsequent  claims" 
might  mean  either  claims  subsequently  to  be  advanced  or 
claims  for  subsequent  damages.  This  clause  contains  de- 
tails of  reparations  to  be  made  during  the  Armistice;  and 
Keynes  points  out  that  the  reservation  concerning  subse- 
quent claims  was  inserted  to  affirm  that  the  list  of  Armistice 
reparations  did  not  cover  all  reparation  claims  of  the  Allies. 

Discussion  in  Peace  Conference 

In  the  Peace  Conference  that  followed,  a  difference  of 
opinion  arose  as  to  the  meaning  of  this  phrase  in  the  Armis- 
tice and  its  binding  power  on  the  Peace  Conference.  M. 
Klotz,  then  President  of  the  French  Commission  on  Repara- 
tions, claimed  that  the  Armistice  terms,  and  not  the  previous 
diplomatic  correspondence,  controlled  the  decisions  of  the 
Peace  Conference.  He  argued  that  under  the  Armistice 
clause,  Germany  might  be  charged  with  the  whole  cost  of 
the  war.  Mr.  Dulles,  the  American  delegate  on  the  Repara- 
tions Commission  of  the  Peace  Conference,  answered  that 
the  diplomatic  correspondence  of  October,  191 8,  leading  to 
the  Peace  Conference,  referred  not  to  the  Armistice  but  to 
the  peace  terms  and  that  the  Armistice  agreement  could  not 
change  the  agreed  basis  of  peace. 

Undoubtedly  the  French  and  British  delegates  were 
influenced  by  their  own  political  situation.  Lloyd  George 
had  conducted  a  campaign  for  re-election,  on  the  issue  that 
Germany  should  be  made  to  pay  the  whole  cost  of  the  war. 
M.  Klotz  had  delivered  a  speech  in  the  Chamber  of  Depu- 
ties, demanding  German  war  costs  to  the  last  franc.  The 
American  delegates  contended,  however,  that  the  pre-Armis- 
tice  agreement  provided  that  Germany  should  pay  no  indem- 
nity, indemnity  being  defined  as  compensation  for  military 
expenditures,  and  therefore  to  be  distinguished  from  repara- 


I60  THE  REPARATIONS  DILEMMA 

tion  for  damages  inflicted  upon  the  Allies  by  German  war 
activities. 

The  discussion  in  the  Reparations  Commission  of  the 
Peace  Conference  brought  out  the  fact  that  the  total  war 
cost  was  so  stupendous  that  Germany  could  not  possibly 
pay  it  all.  M.  Tardieu  estimates  the  total  direct  cost  at  one 
trillion  gold  francs,  or  about  three  times  the  total  estimated 
wealth  of  Germany  before  the  war.^  There  was,  moreover, 
another  practical  reason  why  those  Allied  nations  which 
were  most  insistent  upon  full  indemnification  were  willing 
to  abandon  the  claim  for  total  war  costs.  If  total  war  costs 
were  assessed  against  Germany,  those  countries  which  had 
been  devastated  would  receive  a  smaller  percentage  of  the 
indemnity  paid  by  Germany.  For  example,  France  would 
be  entitled  to  65  per  cent  of  the  actual  damage  done  to 
civilians  and  their  property,  whereas  she  was  entitled  to  only 
20  per  cent  of  the  total  war  costs. 

The  declared  purpose  of  the  Peace  Conference  was  to 
make  Germany  pay  up  to  the  limit  of  her  capacity.  And 
since  it  was  recognized  that  this  would  constitute  a  sum  far 
less  than  the  total  cost  of  the  war  to  the  Allies,  France 
naturally  preferred  to  receive  65  per  cent  of  what  Germany 
could  pay  rather  than  a  claim  for  20  per  cent  of  what  Ger- 
many ought  to  pay.^ 

To  satisfy  the  public  declarations  of  the  Premiers  of 
France  and  Great  Britain,  a  provision  was  inserted  in  the 
Treaty,  stating  that  Germany,  although  liable  for  the  total 
cost  of  the  war,  was  unable  to  pay  in  full,  and  should  there- 
fore merely  make  compensation  for  all  damage  done  to  the 
civilian  population  of  each  Allied  and  Associated  Power 


•  See  quotation  on  page  177. 

*  Although  the  United  States  had  more  to  gain  from  the  assessment 
of  total  war  costs  against  Germany  than  any  other  nation,  the  repre- 
sentatives of  the  United  States  stood  out  against  the  proposal. 


REPARATIONS  CONTROVERSY  l6l 

and  to  their  property  by  German  aggression  by  land,  by  sea, 
and  from  the  air.^ 

Treaty  Terms 

A  further  disagreement  arose  in  the  Reparations  Com- 
mission of  the  Peace  Conference  as  to  what  might  be  in- 
cluded under  these  terms.  The  following  categories  were 
finally  inserted  in  the  Treaty :  ® 

1.  Damage  to  injured  persons  or  surviving  dependents  by  act  of 
war,  either  by  German  or  allied  forces. 

2.  Damage  caused  by  Germany  or  her  allies  to  civilian  victims 
of  all  acts  of  cruelty,  violence,  or  maltreatment. 

3.  Damage  caused  by  Germany  or  her  allies  to  civilian  victims 
of  all  acts  of  injuries  to  health,  capacity  to  work,  or  to  honor. 

4.  Damage  caused  by  any  kind  of  maltreatment  of  prisoners  of 
war. 

5.  Pensions  to  naval  and  military  victims  of  war. 

6.  Cost  of  government  assistance  to  prisoners  of  war. 

7.  Allowances  to  families  of  mobilized  persons. 

8.  Damage  for  labor  without  remuneration. 

9.  Damage  to  property  injured  or  destroyed  by  Germany  or  her 
allies. 

10.  All  levies  or  fines  imposed  by  Germany  or  her  allies. 

Mr.  Dulles,  American  representative  on  the  Reparations 
Commission,  opposed  the  inclusion  of  pensions.  He  con- 
tended that  pensions  to  soldiers  were  not  payments  for  "dam- 
ages to  the  civilian  population,"  under  the  legal  interpretation 
of  the  words.  President  Wilson,  however,  overruled  Mr. 
Dulles  and  inserted  pensions  in  the  reparations  clause.'' 
This  pension  claim  doubled  the  payments  which  Germany 
must  make  under  the  Treaty. 


^Treaty  of  Peace  with  Germany,  Article  232. 
*  Treaty  of  Peace  with  Germany,  Part  VIII,  Annex  I,  Section  I. 
'  See  address  by  Thos.  W.  Lament  in  Philadelphia  in  1920,  widely 
quoted  in  the  public  press. 
11 


I62  THE  REPARATIONS  DILEMMA 

The  Treaty  stipulated  that  the  time  for  payment  should 
cover  thirty  years.®  The  total  sum  to  be  paid  was  not  fixed. 
The  German  government  offered  a  payment  of  123  billion 
gold  marks,  but  the  French  insisted  they  could  not  agree 
to  a  definite  sum  before  they  had  thoroughly  investigated 
the  extent  of  their  losses.  A  provision,  however,  was  in- 
serted in  the  Treaty,  whereby  the  total  payments  to  be  made 
by  Germany  in  reparations  would  be  finally  determined  by 
the  Reparations  Commission  on  May  i,  1921. 

There  remained  to  be  decided  what  the  medium  of  Ger- 
man payments  was  to  be.  Besides  payments  in  gold,  the 
Treaty  provides  that  Germany  may  be  called  upon  to  pay 
in  certain  real  and  personal  property  owned  by  the  German 
government  or  by  German  individuals  outside  of  Germany, 
and  in  commodities,  such  as  ships,  building  material,  cattle, 
and  machinery.  Germany  was  also  allowed  to  charge 
against  reparations  certain  property  which  she  surrendered 
under  the  Treaty  to  the  Allies. 

The  Treaty  further  provided  that  as  evidence  of  this 
'debt  and  security  for  it,  Germany  should  issue  to  the  Repara- 
tions Commission  three  series  of  bonds.  The  first  series 
was  for  20  billion  gold  marks,  bearer  bonds,  without  inter- 
est, payable  May  i,  1921,  The  gold  and  commodities  which 
Germany  was  to  pay  were  to  go  toward  the  amortization  of 
these  bonds,  after  there  had  been  subtracted  therefrom 
the  expenses  of  the  Army  of  Occupation  and  payments  for 
foodstuffs  and  raw  materials  vitally  essential  to  the  re- 
habilitation of  Germany.  The  second  series  of  40  billion 
5  per  cent  gold  bonds  was  to  be  issued  immediately,  while 
a  third  series  of  40  billions  was  to  be  issued  only  when  the 
Reparations  Commission  was  satisfied  that  Germany  could 
meet  interest  and  sinking  fund  charges. 


'Treaty  of  Peace  with  Germany,  Article  238. 


REPARATIONS  CONTROVERSY  163 

In  case  of  voluntary  default  by  Germany,  the  Allies 
might  make  economic  and  financial  prohibitions  and  re- 
prisals and  in  general  take  such  measures  as  the  respective 
governments  might  determine  were  necessary. '^ 

Dispute  Over  Method  of  Evaluation 

As  the  time  approached  for  the  payment  of  the  first 
20  billion  gold  mark  bonds,  on  May  i,  1921,  a  dispute 
arose  between  the  Allies  and  Germany:  first,  as  to  what 
property  taken  away  from  Germany  should  be  counted 
towards  making  up  the  20  billion  of  reparations  due  on 
May  I ;  secondly,  as  to  the  value  of  the  commodities  already 
delivered.  The  Germans  claimed  that  the  value  should  be 
appraised  as  of  the  date  of  delivery.  The  Allies  declared 
that  the  value  should  be  estimated  as  at  the  time  of  sale  or 
settlement.  Since  there  had  recently  been  a  great  drop  in 
the  prices  of  commodities  and  more  especially  in  the  value 
of  ships,  it  will  be  seen  that  the  time  of  valuation  made  a 
big  difference  in  the  total  sum  still  to  be  paid  on  May  i, 
1 92 1.  Germany  claimed  that  she  had  already  delivered 
more  than  the  equivalent  of  20  billion  gold  marks.  The 
Reparations  Commission,  however,  allowed  only  8  billion 
gold  marks,  leaving  12  billions  still  due  on  May  i. 

Many  problems  soon  arose  for  consideration,  the  solu- 
tions of  which  were  not  provided  for  in  the  Treaty  of  Ver- 
sailles. Some  of  the  Allies  also  complained  that  Germany 
was  not  attempting  to  fulfill  the  terms  of  the  Treaty.  The 
Allied  governments  have,  therefore,  held  since  the  Peace 
Conference  a  series  of  conferences  for  the  purpose  of  clari- 
fying the  issues  involved  in  reparations  and  facilitating 
the  payments  to  be  made.  At  the  risk  of  wearying  and  con- 
fusing the   reader,  we  must  present   in  brief   outline   the 


'Treaty  of  Peace  with  Germany,  Part  VIII,  Section  I,  Annex  II, 
Clause  17. 


I64  THE  REPARATIONS  DILEMMA 

history  of  these  conferences,  for  in  no  other  way  can  one 
indicate  the  confusion  that  has  prevailed  ever  since  the 
Peace  Conference  in  the  minds  of  the  statesmen  and  ex- 
perts charged  with  the  administration  of  reparations.  Pass- 
ing by  as  of  minor  importance  three  conferences  of  the 
Allies,  held  at  London,  San-Remo,  and  H>lhe  during  the 
early  months  of  1920,  we  may  proceed  at  once  to  the 
Boulogne  conference,  which  was  held  on  July  2,  1920,  with 
Great  Britain,  France,  Italy,  Belgium,  and  Japan  officially 
represented. 

The  Boulogne  and  Spa  Agreements 

At  the  Boulogne  meeting  an  attempt  was  made  to  define 
how  much  Germany  should  pay  in  goods  and  how  much  in 
"gold  marks."  It  was  decided  that  Germany  should  meet 
the  expense  of  the  Army  of  Occupation  by  payments  in 
goods.  If,  however,  these  payments  in  kind  should  prove 
greater  than  the  costs  of  the  Armies  of  Occupation,  then 
the  residue  was  to  be  used  by  the  Reparations  Commission 
in  paying  any  default  in  the  further  reparations  require- 
ments. 

To  satisfy  the  Belgian  war  debt,  assumed  by  Germany 
under  the  terms  of  the  Treaty  and  the  general  reparations 
claims,  in  addition  to  payments  in  kind,  Germany  was  to 
pay  yearly  3  billion  gold  marks,  payable  during  42  years 
from  May  i,  1921.  From  May  i,  1926,  to  May  i,  1931, 
Germany  was  to  pay  a  further  sum  of  3  billion  gold  marks ; 
from  May  i,  1931,  this  sum  was  to  be  raised  to  a  yearly 
payment  of  4  billion  gold  marks  over  a  period  of  32  years. 

Germany  was  also  to  float  bonds,  with  the  aid  of  the 
Reparations  Commission,  in  order  to  retire  the  reparations 
bonds  provided  for  in  the  Treaty  itself.  These  loans  secured 
by  the  German  government  were  to  be  a  lien  on  property 
and  resources  of  Germany,  including  the  German  customs. 


REPARATIONS  CONTROVERSY  165 

Twenty  per  cent  of  these  loans  Germany  might  retire  for 
internal  use.  At  the  end  of  three  months  she  was  to  de- 
posit as  collateral  with  the  Reparations  Commission  German 
industrial  and  other  securities  to  the  amount  designated  by 
the  Commission.  But  a  limit  of  5  billion  marks  gold  was 
placed  on  the  value  of  German  industrial  securities  that 
might  be  accepted.  In  addition,  the  total  receipts  of  the 
German  customs  were  to  be  deposited  as  security  for  the  exe- 
cution of  this  agreement,  with  a  general  receiver  of  Ger- 
man customs  named  by  the  Allies. 

In  case  of  the  failure  of  Germany  to  pay  the  sums  pro- 
vided in  this  agreement,  the  securities  deposited  by  the 
German  government  with  the  Reparations  Commission  and 
the  total  receipts  of  customs  in  the  hands  of  the  receiver 
would  be  forfeited. 

Another  meeting  was  held  at  Spa,  July  16,  1920.  At 
this  meeting  it  was  decided  that  France  should  get  52  per 
cent,  the  British  Empire  22  per  cent,  Italy  10  per  cent, 
and  Belgium  8  per  cent,  of  whatever  reparations  were  paid 
by  Germany.  It  was  resolved  to  fix  definitely  the  total 
payments  to  be  made  by  Germany ;  and  a  method  of  repara- 
tion accounting  between  the  Allies  was  agreed  upon.^® 

There  was  a  further  agreement  at  Spa  reducing  the 
amount  of  coal  Germany  was  to  pay  the  Allies  for  six 
months  to  2  million  tons  a  month.  In  consideration  of 
the  impoverished  condition  of  German  miners,  the  Allies, 
on  their  part,  were  to  make  loans  to  Germany  for  the  relief 
of  the  mining  population.  As  France  was  to  receive  most 
of  this  coal,  she  was  required  to  make  61  per  cent  of  these 
loans;  Great  Britain  24  per  cent;  Italy  7  per  cent;  and 
Belgium  8  per  cent. 


See  discussion  on  page  176. 


l66  THE  REPARATIONS  DILEMMA 

The  Brussels  Conference 

There  followed  on  January  i8,  1921,  the  meeting  of 
Allied  experts  at  Brussels.  In  recognition  of  the  precarious 
condition  of  German  finances,  the  experts  recommended: 

1.  Payment  of  3  billion  marks  a  year  by  Germany  for  a  period 
of  five  years,  leaving  the  question  of  further  payments  until  such 
time  as  the  ability  of  Germany  to  pay  could  be  more  definitely 
determined. 

2.  Fixing  a  minimum  of  payments  that  may  be  made  in  kind. 

3.  Guarantees  for  non-fulfilment  of  the  reparation  demands  by 
Germany,  as  follov^^s: 

(a)  Seizure  of  the  customs. 

(b)  Imposition  of  indirect  taxes. 

(c)  The  suppression  of  certain  government  expenses  such 

as  interest  and  sinking  fund  on  the  German  debt. 

4.  Allied  control  of  the  distribution  of  coal  in  upper  Silesia. 

5.  The  following  modifications  of  the  Treaty: 

(a)  Limiting  payments  to  be  made  now  to  payments  in  kind. 

It  was  held  that  a  part  must  be  paid  in  cash. 

(b)  Reduction  of  coal  deliveries  below  the  Spa  standard. 

(c)  Continuation  of  contributions  to  support  of  coal  miners, 

(d)  The  return  of  German  property  in  Allied  countries  not 

yet  sold. 

(e)  Suppression  of  the  plebiscite  in  upper  Silesia. 

6.  Certain  concessions  to  German  demands : 

(a)  Limitation  of  expenditures  of  Army  of  Occupation  to 

240  million  gold  marks,  in  accordance  with  the  agree- 
ment of  Allied  Prime  Ministers  of  June,  1919. 

(b)  Simplification  of  the  payments  under  Treaty  of  Versailles 

so  that  the  German  government  may  know  the  total  of 
all  payments,  including  reparations. 

(c)  A  general  statement  should  be  made  that  the  Allies  do 

not  intend  to  use  the  terms  of  the  Versailles  Treaty  to 
prevent  the  legitimate  development  of  German  trade. 

(d)  Renouncing   the    demand    made    of   Germany    to    build 

further  tonnage,  allowing  Germans  to  keep  ships  not 
delivered  for  a  certain  number  of  years,  or  giving  back 
to  Germany  for  a  period  of  years  some  of  her  shipping. 


REPARATIONS  CONTROVERSY  I67 

(e)  Germany  to  be  informed  of  the  exact  amount  and  time 

of  each  payment  required  of  her  in  the  future. 

(f)  Abandonment  by  Allies  of  right  under  Treaty  to  seize 

German  property  in  Allied  countries  in  case  Germany 
defaults. 

(g)  Making  exception  in   favor  of  small  property  holders 

whose    possessions    had    been    confiscated    in    Allied 
countries. 


Paris  Proposal 

On  the  29th  of  January,  1921,  the  Allied  Supreme  Coun- 
cil met  in  Paris  for  the  purpose  of  formulating  proposals 
for  the  final  settlement  of  the  whole  reparations  issue.  It  is 
interesting  to  note  that  they  largely  ignored  the  recommen- 
dations of  the  experts,  made  eleven  days  earlier  at  Brussels. 
It  was  decided  that  the  total  Germany  was  to  pay  for  repara- 
tions should  be  226  billion  marks,  plus  12  per  cent  of  Ger- 
many's total  exports.  Payments  were  to  be  spread  over 
a  period  of  42  years,  as  follows :  2  billion  gold  marks  per 
annum  for  the  first  2  years;  3  billions  annually  for  the 
next  3  years;  4  billions  annually  for  3  years;  five  billions 
annually  for  3  years;  and  6  billions  annually  for  31  years. 
In  addition  to  this,  12  per  cent  of  the  total  annual  exports 
was  to  be  added  to  each  yearly  payment.  These  figures 
were  officially  submitted  to  Germany  for  acceptance. 

At  the  London  conference  on  March  3,  1921,  Germany 
presented  a  counter  proposal,  which  amounted  to  an  immedi- 
ate payment  of  30  billion  gold  marks  (the  bonds  to  run  for 
72  years).  This  the  Allies  refused  to  accept,  even  as  a  basis 
for  discussion,  Lloyd  George  declaring  that  the  reply  of 
Dr.  Simons  on  behalf  of  the  German  government  was  in 
definite  defiance  of  the  fundamental  conditions  laid  down 
in  the  Treaty  of  Versailles.  The  Allies  then  proceeded 
forthwith  to  occupy  the  coal  ports  on  the  east  bank  of  the 
Rhine  near  the  Ruhr  district.     They  also  drew  up  a  cus- 


I68  THE  REPARATIONS  DILEMMA 

toms  frontier  between  east  and  west  Germany,  with  a  view 
to  collecting  customs  on  goods  shipped  from  one  port  of 
Germany  to  the  other.  The  Allies  also  threatened  to  occupy 
the  whole  of  the  Ruhr  district  if  Germany  did  not  pay  the 
12  billion  gold  marks,  still  due,  on  May  i. 

At  this  stage  of  the  proceedings  the  German  govern- 
ment appealed  to  the  United  States  to  intervene,  as  arbi- 
trator of  the  reparation  issue.  The  United  States  govern- 
ment refused,  but  expressed  the  hope  that  Germany  would 
in  good  faith  make  a  further  offer  to  the  Allies. 

Germany  then  offered  on  April  25  a  principal  sum  of 
50  billion  marks,  amounting  with  interest  over  a  period  of 
years  to  200  billion  marks — as  compared  with  the  Allied 
demands  of  226  billion  marks  plus  the  12  per  cent  tax  on 
exports.  This  offer  was  accompanied  by  numerous  stipu- 
lations for  the  cancellation  of  various  provisions  in  the 
Treaty  of  Versailles,  including  the  return  of  German  prop- 
erty in  Allied  countries.  The  offer  was  made  through  the 
United  States,  but  Secretary  Hughes  refused  to  transmit 
it  because,  after  consultation,  it  was  found  to  be  unaccept- 
able to  the  Allies. 

The  Final  Settlement 

The  Allies  then  served  an  ultimatum  to  Germany  which, 
if  not  accepted  before  May  12,  was  to  be  followed  by  mili- 
tary occupation  of  the  Ruhr  Valley.  Under  the  terms  of 
this  ultimatum,  which  was  accepted,  Germany  must  pay  a 
total  principal  sum  of  132  billion  gold  marks  ($33,000,- 
000,000).  The  term  of  years  over  which  the  payments 
are  to  be  made  is  not  fixed,  and  accordingly  the  total 
amount  ultimately  required  to  liquidate  the  account,  in- 
cluding interest,  cannot  be  dejfinitely  computed.  The  princi- 
pal is,  however,  much  larger  than  that  called  for  in  the  Paris 
proposals    of    January,    1921;    and    since    the    ultimatum 


REPARATIONS  CONTROVERSY  169 

provides  for  a  sinking  fund  of  only  i  per  cent  per  annum, 
which  will  wipe  out  the  debt  in  100  years,  it  is  by  no  means 
certain  that  the  ultimate  amount  to  be  paid  will  not  prove 
to  be  vastly  greater  than  that  called  for  by  the  "Paris  settle- 
ment." It  should  be  understood,  however,  that  Germany 
is  permitted  to  reduce  the  principal  at  a  more  rapid  rate 
than  is  indicated  by  the  i  per  cent  sinking  fund  provision, 
which  is  in  the  nature  of  a  minimum  requirement. 

The  evidence  of  this  reparations  settlement  is  to  be  three 
issues  of  bonds:  the  first  of  12  billion  gold  marks;  the 
second  of  38  billion  gold  marks ;  and  the  third  of  62  billion 
gold  marks.  These  bonds  are  to  bear  an  annual  interest  rate 
of  5  per  cent,  with  an  additional  i  per  cent  for  sinking  fund, 
as  already  noted.  The  first  series  of  bonds  (12  billion 
marks)  must  be  issued  on  July  i,  1921,  with  interest  and 
sinking  fund  provisions  retroactive  to  May  i.  The  second 
series  (38  billion  marks)  must  be  issued  on  November  i, 
1921.  The  interest  and  sinking  fund  on  these  two  issues 
will  amount  to  3  billions  annually.  The  third  series  (82 
billion  marks)  must  be  delivered  to  the  Reparations  Com- 
mission on  November  i,  1921;  but  it  is  not  to  be  issued 
until  such  time  as  the  Reparations  Commission  is  satisfied 
that  Germany  is  able  to  meet  the  interest  and  sinking  fund 
payments  thereon.  It  will,  therefore,  be  seen  that  it  is  not 
expected  that,  for  the  present,  Germany  will  be  able  to  meet 
interest  and  sinking  fund  requirements  on  more  than  50 
billion  marks. 

There  is  an  additional  provision,  however,  which  affects 
the  amount  of  payments  that  Germany  must  annually  make. 
It  is  stipulated  that  Germany  must  pay  an  annual  sum  of  2 
billion  gold  marks,  plus  26  per  cent  (of  which  i  per  cent 
is  for  sinking  fund)  of  the  total  exports.  If  the  annual 
exports  should  equal  4  billion  marks,  the  total  annual  pay- 
ment required  would  be  3  billion  marks,  just  equal  to  6  per 


170  THE  REPARATIONS  DILEMMA 

cent  on  the  first  two  issues  of  bonds  (50  billions).  If  the 
exports  should  be  8  billions,  Germany  would  have  to  pay 
4  billions'  reparations ;  and  the  extra  billion  would  be  applied 
in  settlement  of  interest  and  sinking  fund  on  series  3  of  the 
reparation  bond  issues. 

For  the  first  six  months  Germany  is  not  required  to  pay 
26  per  cent  on  her  exports.  One  billion  gold  marks  will 
suffice.  This  is  the  smallest  half-year  payment  that  will 
ever  be  required;  for  Germany's  exports,  as  we  shall  see 
in  the  following  chapter,  must  be  very  large  if  she  is  able 
to  pay  the  total  reparations  demanded.  This  first  billion 
marks  must  be  paid  before  June  6,  1921,  "in  gold,  approved 
foreign  currency,  or  approved  foreign  bills,  or  in  drafts 
at  three  months  on  the  German  Treasury,  indorsed  by 
approved  German  banks." 

This  ultimatum  was  followed  by  a  Cabinet  crisis,  and  the 
existing  German  government  was  replaced  by  one  that  ac- 
cepted unconditionally  the  terms  of  the  Allied  demands. 
In  payment  of  the  first  charges  Germany  has  already 
offered,  and  the  Reparations  Commission  has  accepted,  150 
million  marks  in  gold  and  foreign  bills  of  exchange.  The 
remainder  of  the  first  billion  marks  (850  millions)  was  paid 
by  indorsed  Treasury  notes  payable  in  three  months.  The 
first  real  test  of  Germany's  ability  did  not,  therefore,  come 
until  September  i,  1921,  when  the  notes  fell  due.  Germany 
has  in  fact  now  made  the  first  half-year's  payment  in  full. 

Payments  Already  Made 

Before  passing  to  the  question  of  German  ability  to  meet 
these  reparation  requirements,  it  will  be  interesting  to  ascer- 
tain what  Germany  had  paid  to  the  Allies  up  to  May  i,  1921. 
The  following  statement  is  taken  from  a  report  on  the 
subject  by  the  League  of  Nations :  ^^ 

League  of  Nations,  Vol.  Ill,  No.  6,  December,  1920. 


REPARATIONS  CONTROVERSY  171 

German  Deliveries  to  the  Reparations  Commission 

17,800,000  tons  of  coal 

19,000  tons  of  sulphate  of  ammonia 
2,054,000  tons  of  steamers,  sailing  vessels,  and  trawlers 
38,700  tons  of  river  craft  and  material 
360,000  livestock 
6,800,000  kilos  of  seeds 
10,700,000  kilos  of  pharmaceutical  products 
4,571  locomotives 
129,500  freight  cars 
500,000  motor  lorries 
140,000  tons  of  railway  materials 
121,000  agricultural  machinery,  machines,  and  imple- 
ments 
Submarine    Cables :    Emden-Vigo ;    Emden- 
Brest;     Emden-Teneriffe;     Emden- Azores 
(2  cables   from   Emden   to  the   Azores)  ; 
Azores-New  York   (2  cables)  ;  Teneriffe- 
Monrovia;  Monrovia-Lome;  Lome-Duala; 
Monrovia-Pernambuco ;        Constantinople- 
Constanza;     Yap-Shanghai;     Yap-Guam; 
and  Yap-Menado. 

"The  above  list  does  not  include  certain  deliveries  or 
cessions  of  a  different  kind,  which  either  are,  or  are  sus- 
ceptible of,  being  credited  to  Germany,  but  for  which 
figures  are  not  yet  completely  determined :  public  properties, 
and  parts  of  debts  in  ceded  territories,  the  Saar  Basin, 
material  abandoned  after  November  11,  1918,  etc.  More- 
over this  list  does  not  include  deliveries  or  cessions  from 
Powers  other  than  Germany  as  provided  by  Treaties." 

Germany  has  also  made  restitution  of  the  following 
articles.  By  the  terms  of  the  Treaty  these  are  not  included 
in  the  reparations  account. 

13,560  agricultural  machines 
271,000  tons  industrial  material 
407  locomotives 
18,928  freight  cars 


172  THE  REPARATIONS  DILEMMA 

In  addition  to  these  deliveries  other  categories  of  goods 
have  been  restored,  such  as  stocks  and  personal  property, 
and  objects  of  art.  The  value  of  these  has  been  estimated 
by  M.  Tardieu  at  6^^  billion  gold  marks,^^ 

Finally,  according  to  the  report  of  Marshal  Foch, 
December  31,  1920,  Germany  has  handed  over  the  following 
equipment : 

41,000  cannons  complete 
29,000  cannon  barrels 
163,000  machine  guns  complete 
2,800,000  rifles 
16,000  airplanes 
25,000  airplane  motors 

In  January,  1921,  the  German  Commissioner  for  Dis- 
armament announced  the  collection  for  delivery  of  the  fol- 
lowing additional  armament : 

932  cannons 

18,000  machine  guns 

2,000,000  rifles  and  carbines 

78,000  revolvers 

M.  Tardieu  estimates  that  the  Allied  and  Associate 
Powers  have  received  5  billion  marks  of  personal  property 
in  the  form  of  German  materials.^^  In  addition  to  this  the 
property  sequestered  by  the  Allied  and  Associate  govern- 
ments amounts  to  between  11  and  13  billions,  and  loans 
in  foreign  countries  to  2  billions.  This  makes  a  total  of, 
say,  nearly  20  billion  marks'  worth  of  German  property 
sequestered  by  the  Allied  governments.  Moreover,  Article 
261  of  the  Treaty  transfers  to  the  Allies  all  loans  granted 
by  Germany  to  her  allies.    These  are  estimated  by  M.  Tar- 


'  M.  Andre  Tardieu,  "The  Truth  about  the  Treaty." 
Ibid. 


REPARATIONS  CONTROVERSY  173 

dieu  at  12  billions.  These  items,  taken  in  conjunction  with 
the  8  billions  already  paid  to  the  Reparations  Commission, 
make  a  total  of  from  38  to  40  billion  gold  marks'  worth  of 
German  wealth  which  has  passed  into  the  hands  of  the 
Allies.  This,  of  course,  does  not  take  into  account  the 
value  of  the  German  colonies,  nor  of  territory  in  Europe 
formerly  owned  by  Germany  that  was  ceded  by  the  terms 
of  the  treaties  to  the  Allies. 

Benefits  Derived 

It  will  be  interesting  now  to  inquire  how  much  direct 
and  immediate  benefit  the  Allies  have  received  from  the 
German  territory  and  property  surrendered,  and  from  the 
reparations  payments  thus  far  made.  Germany's  capacity 
to  pay  reparations  now  and  in  the  future  has  obviously 
been  materially  reduced,  as  a  result  of  the  loss  of  her 
colonies,  of  Alsace-Lorraine,  of  Posen,  of  East  Prussia, 
etc.,  in  addition  to  the  Saar  Valley,  for  a  period  of  fifteen 
years.  The  reparations  payments,  amounting  to  8  billion 
gold  marks,  together  with  the  loss  of  personal  and  real 
property  in  foreign  lands  and  of  loans  or  investments 
abroad,  have  also  reduced  the  annual  income  of  Germany. 
It  should  be  noted,  however,  that  the  10  billion  marks  in 
the  form  of  loans  to  Germany's  allies,  which  was  credited 
to  the  Entente,  did  not  represent  any  actual  immediate  loss 
to  Germany,  for  at  no  time  has  there  been  any  possibility 
of  these  loans  being  paid. 

From  the  point  of  view  of  the  Allies,  the  acquisition  of 
the  German  colonies,  whatever  advantages  may  possibly 
accrue  in  the  long  run,  will  afford  no  immediate  fiscal  relief. 
They  cannot  be  sold  for  cash;  nor  in  view  of  the  conges- 
tion of  the  world's  financial  markets  can  real  estate  mort- 
gages against  them  be  marketed  for  cash.  The  acquisition 
of  Alsace-Lorraine  is  as  likely  to  prove  an  immediate  source 


174  THE  REPARATIONS  DILEMMA 

of  expense  as  of  profit  to  France.  It  has  already  been 
proved  that  it  will  require  a  considerable  period  of  time  to 
develop  the  iron  mines  of  Lorraine  to  a  revenue-producing 
basis;  and  we  have  it  on  the  highest  authority  that  it  has 
already  been  demonstrated  that  the  Saar  cannot  now  be 
profitably  operated  by  France.  It  is  partly  a  matter  of 
labor  output  and  partly  a  matter  of  distance  from  available 
markets.  The  loss  of  Posen,  East  Prussia,  and  Danzig  has 
lessened  Germany's  capacity  to  pay;  but  these  lands  yield 
no  new  revenue  to  the  Allies. 

It  is  extremely  doubtful  whether  the  sequestration  of 
real  and  personal  property  of  German  citizens  in  Allied  and 
associate  countries  has  aided  the  Allies  to  the  extent  it  has 
injured  Germany.  The  vast  majority  of  the  wealth  of 
Germans  in  Allied  countries  consisted  of  property  of  Ger- 
man business  enterprises  which  formed  a  part  of  the  great 
German  system  of  international  commerce.  The  chief  value 
of  these  properties  was  their  function  as  links  in  the  world 
chain  of  German  business.  When  they  were  removed  from 
their  relationship  with  German  commerce  and  industry,  their 
chief  value  was  destroyed.  While  the  sequestration  of  this 
property  was  a  loss  to  Germany,  it  added  little  to  the  earn- 
ing capacity  of  Allied  countries.  These  German  properties 
had  to  be  sold  at  an  insignificant  part  of  their  former  value 
as  an  integral  part  of  the  German  business  organization. 
The  people  who  bought  these  properties  frequently  did  so 
as  an  experiment,  tempted  by  the  low  price  asked. 

Some  idea  of  the  nature  of  these  sales  transactions  of 
German  business  enterprises  in  Allied  countries  may  be 
gathered  from  the  following  instance,  cited  to  us  by  high 
authority.  A  large  rubber  concern  in  Hanover  owned  a 
subsidiary  plant  near  Paris.  The  French  plant  was  seized 
during  the  war  by  government  authorities  and  sold  at  an 
extremely  low  price  to  a  French  company.     This  French 


REPARATIONS  CONTROVERSY  175 

company  attempted,  without  success,  to  run  the  plant. 
Finally,  after  peace  was  made  with  Germany,  the  French 
management  offered  the  manager  of  the  parent  company 
in  Hanover  approximately  40  per  cent  of  the  stock  of  the 
company  if  he  would  agree  to  operate  the  plant. 

Method  of  Sharing 

Let  us  now  inquire  which  Allied  nations  have  received 
the  primary  benefit  from  the  8  billions  of  reparations  that 
have  been  taken  over  by  them.  Common  justice  would 
seem  to  demand  that  the  first  payments  made  by  Germany 
should  have  gone  to  those  belligerents  which  had  borne  the 
brunt  of  the  German  attack  and  suffered  most  from  the 
consequences  of  the  war.  Such  does  not,  however,  appear 
to  have  been  the  case. 

So  far  as  the  French  share  of  the  8  billion  marks' 
worth  of  property  officially  credited  to  reparations  up  to 
May,  1 92 1,  is  concerned,  it  afforded  little  direct  financial 
assistance  to  the  French  budget.  The  commodities  received 
were  for  the  most  part  used  in  reimbursing  individuals  who 
had  suffered  as  a  result  of  the  German  occupation.  With 
the  exception  of  coal,  some  of  which  was  sold  to  other  coun- 
tries, comparatively  little  direct  financial  aid  was  given 
to  the  French  government. 

Moreover,  astonishing  as  it  may  seem,  the  truth  is  that 
of  the  reparations  funds  received  since  the  May  settlement, 
practically  none  will  go  to  France.  There  were  300  million 
gold  marks,  for  example,  in  the  reparations  fund  in  July, 
1 92 1,  none  of  which  would  accrue  to  France.  To  explain 
this  seeming  injustice  it  is  necessary  to  state  that  there  is  a 
joint  reparations  account  among  the  Allies  under  which 
each  nation  receives  payments  in  proportion  to  a  certain 
fractional  arrangement.  As  each  country  receives  payment 
in  kind,  that  is  to  say,  in  ships,  coal,  etc.,  it  is  charged  in 


176  THE  REPARATIONS  DILEMMA 

the  reparations  account  with  the  value  of  the  commodities 
received. 

Now  an  agreement  was  entered  into  at  Spa  between 
France  and  Great  Britain  whereby  Great  Britain  was  per- 
mitted to  value  the  shipping  tonnage  received  from  Germany, 
not  at  the  price  of  tonnage  at  the  time  the  ships  were 
received,  but  at  the  price  that  might  prevail  at  the  time  the 
British  government  should  ultimately  sell  the  ships  to  British 
purchasers.  The  British  government  made  use  of  the  Ger- 
man shipping  so  long  as  post-war  demand  for  shipping  per- 
sisted. After  the  great  depression  in  shipping  developed, 
the  German  ships  were  sold  by  the  British  government  at 
an  enormous  reduction  in  price.  The  significance  of  this 
may  be  seen  from  the  fact  that  Great  Britain  set  a  price 
of  £70  per  ton  as  the  value  of  her  own  ships  constructed 
and  lost  during  the  war,  for  which  she  claimed  reparations ; 
while  under  the  Spa  agreement  the  German  ships  received 
by  Great  Britain  in  reparation  are  valued  at  a  selling  price 
of  only  £15  per  ton.^* 

On  the  other  hand,  the  Reparations  Commission  has 
decided  that  France  shall  be  debited  in  the  reparations  ac- 
count with  the  entire  value  of  the  coal  mines  of  the  Saar. 
The  decision  of  the  Reparations  Commission  is  legally  cor- 
rect, since  the  title  to  the  coal  mines  passes  to  France  under 
the  Treaty.  It  may  be  added  that  if  Germany  at  the  end 
of  fifteen  years  recovers  the  Saar  by  plebiscite,  she  must 
then  pay  to  France  the  value  of  the  coal  still  unmined. 
From  the  point  of  view  of  the  immediate  fiscal  requirements 
of  the  French  government,  however,  the  decision  is  very 
bad,  for  it  means  that  in  the  immediate  future  France  gets 
no  cash  from  the  reparations  account. 


"  Rapport,  Chambre  des  deputes  de  la  Commission  des  Finance 
Chargee  d'Examiner  le  Projet  de  loi  du  Budget  General  de  I'Exercice, 
1 92 1,  par  L.  de  Lasteyrie,  page  34. 


CHAPTER  XIII 

GERMANY'S  ABILITY  TO  PAY 

Three  Separate  Issues 

When  the  history  of  German  reparations  is  finally  com- 
pleted, we  shall  find  that  there  will  have  been  three  distinct 
issues  about  which  the  discussion  has  centered.  They  are : 
( I )  how  much  Germany  ought  to  pay ;  ( 2 )  how  much  Ger- 
many can  pay;  and  (3)  how  much  the  Allies  are,  in  fact, 
willing  to  be  paid.  We  shall  consider  the  first  two  of  these 
in  the  present  chapter,  and  the  third  in  the  chapter  which 
follows. 

The  first  of  these  issues  may  be  very  quickly  passed 
over.  If  the  principle  were  adopted  that  Germany  should 
merely  repair  all  the  damages  sustained  by  the  Allies — if 
reparation  rather  than  indemnity  were  accepted  as  the  basis 
of  a  just  settlement — the  only  question  to  be  decided  would 
be  the  exact  amount  of  the  damages  that  had  been  wrought 
by  German  aggression.  The  bill  could  then  be  prepared 
and  presented  to  Germany  for  signature.  But  the  compu- 
tations of  financial  experts  as  to  the  total  losses  sustained 
by  the  Allies  reached  such  staggering  totals  that  it  was 
feared  Germany  might  not  be  able  to  pay  the  full  amount 
which  justice  required.  For  example,  Andre  Tardieu,  in 
this  recent  volume,  "The  Truth  About  the  Treaty,"  ^  says : 

"The  figures  revealed,  that,  if  we  were  to  insist  upon 
the  three  claims — damage  to  property,  damage  to  person, 
and  war  expenses — we  would  reach  a  total  capital  of  1,000 
million  (one  trillion)  francs,  the  payment  of  which  over  a 


*Page  290. 

la  177 


178  THE  REPARATIONS  DILEMMA 

period  of  fifty  years  would  represent,  taking  into  account 
interest  and  sinking  fund,  more  than  3,000  million  (three 
trillion)  francs,  a  sum  so  great  that  it  is  unreal.  If,  faith- 
ful to  this  reasoning  as  logic  demanded,  we  had  demanded 
also  on  the  ground  of  full  and  complete  reparation  and  in 
accordance  with  full  justice,  payment  of  indirect  damages, 
loss  in  operation,  loss  of  profits,  etc.  ...  we  should  per- 
haps have  reached  some  such  fabulous  total  as  7,000,  8,000, 
or  10,000  billions.  It  was  clear  that  if  the  conference  was 
to  get  practical  results,  it  would  have  to  move  only  with 
extreme  prudence." 

In  accordance  with  the  dictates  of  prudence,  the  em- 
phasis was,  therefore,  soon  shifted  from  the  question  of 
how  much  Germany  should  pay,  to  the  question  of  how 
much  Germany  could  pay.  The  acceptance  of  this  second 
basis  of  settlement  led  to  a  very  substantial  reduction  in  the 
amount  of  the  demands  upon  Germany.  But  lest  time 
should  prove  that  Germany  might  eventually  be  able  to 
pay  more  than  what  appeared  at  the  moment  to  be  probable, 
the  ultimate  amount  was,  as  we  have  seen,  left  open  for 
future  determination. 

Keynes's  Estimate  of  Ability  to  Pay 

It  was  during  this  phase  of  the  reparations  discussion 
that  John  Meynard  Keynes,  representative  of  the  British 
Treasury  at  the  Peace  Conference,  broke  with  his  associates 
and  prepared  his  well-known  volume,  "The  Economic  Con- 
sequences of  the  Peace."  Keynes  endeavored  to  show, 
among  other  things,  that  Germany  could  not  reasonably  be 
expected  to  pay  more  than  a  fraction  of  the  amount  the 
Allied  estimates  called  for.  It  is  unnecessary  to  repeat  here 
Keynes's  analysis;  it  is  sufficient  for  our  present  purposes 
that  he  believed  that  Germany  might  conceivably  be  able 
to  pay  annually  £100,000,000  (2  billion  marks),  but  that 


GERMAxNY'S  ABILITY  TO  PAY  179 

for  political  and  other  reasons  it  would  probably  prove  im- 
prudent and  impractical  to  exact  so  high  a  figure.  The 
aggregate  amount  that  Germany  could  reasonably  be  ex- 
pected to  pay  over  a  period  of  years  he  estimated  at  about 
40  billion  marks. 

An  attempted  refutation  of  Keynes's  argument  is  found 
in  Tardieu's  volume,  to  which  reference  has  just  been  made. 
In  his  chapter  entitled,  "How  the  Allies  Will  be  Paid," 
Tardieu  seeks  to  prove  by  a  citation  of  statistics  of  German 
wealth  production  and  consumption  that  Germany  is  abun- 
dantly able  to  pay  all  that  the  Allies  are  demanding.  Tar- 
dieu's eminent  position  as  Chairman  of  the  French  High 
Commission  to  the  United  States  during  the  war,  and  as 
friend  and  financial  counselor  to  Premier  Clemenceau,  gives 
to  his  opinions  so  great  an  air  of  authority  that  it  is  neces- 
sary to  make  a  careful  analysis  of  his  contentions. 

The  truth  is  that  Tardieu's  own  figures  support  Keynes's 
rather  than  his  own  contention.  But  we  must  first  see  how 
Tardieu  proves  that  Germany  can  pay.  His  method  of 
analysis,  in  brief,  is  to  ascertain  the  excess  of  German  pro- 
duction over  consumption  before  the  war,  and  then  to  esti- 
mate the  probable  excess  of  German  production  over  con- 
sumption now  and  in  the  years  to  come.  This  excess  of 
production  over  consumption  in  Tardieu's  view  measures 
German  ability  to  pay.    Tardieu's  analysis  follows,  in  brief. 

Tardieu's  Calculation 

German  wealth  before  the  war,  according  to  Helflfrich, 
a  well-known  German  economist,  was  330  billion  marks, 
and  the  annual  production  (or  gross  income)  was  43  billion 
marks — 13  per  cent  of  the  national  wealth.  Since  German 
consumption  was  estimated  at  33  billion  marks,  there  was 
left  an  annual  excess  of  production  over  consumption  of  10 
billion  marks,  or  about  2  billion  dollars  annual  savings. 


iSO  THE  REPARATIONS  DILEMMA 

In  computing  the  present  productive  capacity  of  Ger- 
many, Tardieu  estimates  that  on  account  of  the  loss  of 
territory  and  population,  about  one-eighth  of  the  German 
productive  power  has  been  destroyed.  One-eighth  of  43  bil- 
lions equals  5.5  billions.  In  addition  to  this  there  has  been 
a  loss  of  capital  as  follows : 

Marks 

Personal  property  in  foreign  lands 5,000,000,000 

Real  property  in  foreign  lands  sequestrated  by  govern- 
ments    13,000,000,000 

Loans  in  foreign  countries 2,000,000,000 

Stocks  of  goods  which  have  disappeared 20,000,000,000 

Damage  caused  by  Russian  invasion  of  Eastern  Prussia  2,000,000,000 

Payments  due  to  Allies  by  May  i,  1921* 20,000,000,000 

Total   62,000,000,000 

*  Of  this  amount  only  8  billions  has,  according  to  the  Reparations  Commission,  been 
paid.    See  discussion  on  page  163. 

To  these  figures  must  still  be  added  the  losses  to  capital 
equipment  on  account  of  the  failure  during  the  war  to  main- 
tain it  in  proper  condition.  Of  the  330  billion  marks — the 
total  wealth  of  Germany  before  the  war — Tardieu  deducts, 
before  getting  a  basis  for  computing  depreciation,  30 
billions  for  urban  land  values,  which  have  not  depreciated, 
plus  the  43  billions  (loss  of  territory)  and  the  62  billions 
(loss  of  capital)  mentioned  in  the  preceding  paragraph  and 
table.  This  leaves  about  200  billion  marks,  on  which  the 
depreciation,  figured  at  5  per  cent  annually  for  41-3  years — 
the  duration  of  the  war — is  43  billion  marks. 

Now  62  billion  marks  (see  table  above)  plus  43  billion 
marks  (depreciation)  equals  105  billion  marks  (total  capital 
loss).  To  obtain  the  annual  reduction  in  national  productive 
power  occasioned  by  this  capital  loss,  Tardieu  assumes  that 
the  net  revenue  on  capital  is  6  per  cent.  Six  per  cent  of  105 
billions  equals  6.3  billions  (reduction  of  annual  production 


GERMANY'S  ABILITY  TO  PAY  l8l 

on  account  of  capital  loss).  Adding  this  6.3  billions  to 
5.5  billions  (territory  loss)  gives  a  total  of  11.8  billions 
(total  reduction  in  national  productive  power).  Present 
production,  therefore,  equals  43  billions  (pre-war  produc- 
tion) less  1 1.8  billions  (loss  of  production),  or  31.2  billions. 

In  order  to  measure  German  ability  to  pay,  it  only 
remains  now,  according  to  Tardieu,  to  find  out  the  present 
consumption  of  Germany.  German  consumption  before  the 
war  was  estimated  at  33  billions.  But  since  the  loss  of  ter- 
ritory has  reduced  consumption  as  well  as  production,  pro- 
portional allowance  must  be  made  in  the  consumption  figures. 
One-eighth  of  33  billions  equals  4.12  billions  (loss  of  con- 
suming power  on  account  of  loss  of  territory).  In  addi- 
tion, the  standard  of  living  has  been  reduced.  German 
writers  generally  estimate  the  extent  at  33  per  cent;  but  in 
order  to  be  conservative,  Tardieu  figures  it  at  only  6  billions, 
making  a  total  reduction  in  consumption  of  10.12  billion 
marks. 

Now  33  billions  minus  10.12  billions  equals  22.88  bil- 
lions (present  consumption).  Subtracting  this  22.88 
billions  from  31.2  billions  (present  production)  gives  8.32 
billion  marks,  the  excess  of  present  production  over  present 
consumption  in  Germany.  This  is  more  than  ample  to 
permit  Germany  to  pay  the  2  billion  marks  demanded  annu- 
ally, plus  26  per  cent  of  the  total  exports  of  Germany. 

Error  in  Tardieu's  Method 

Before  accepting  this  conclusion  there  should  be  noted 
a  vital  error  in  Tardieu's  method  of  computation.  In 
figuring  the  total  of  German  annual  production  before  the 
war,  Tardieu  accepted  the  estimate  of  43  billion  marks, 
which,  as  noted  above,  was  equal  to  a  gross  income  of  13 
per  cent  of  the  national  wealth.  But  in  estimating  the 
loss  of  German  production  (gross  income)  in  consequence 


l82  THE  REPARATIONS  DILEMMA 

of  the  reduction  of  capital  by  105  billions,  Tardieu,  as  we 
have  seen,  discards  the  13  per  cent  and  takes  6  per  cent,  the 
net  income.  By  this  process  he  is  able  to  make  out  that  the 
loss  of  German  production  in  consequence  of  reduced  capital 
equipment  is  only  6.3  billions,  whereas  it  should  be  13.65 
billions.  In  order  to  appreciate  fully  what  this  shift  in  the 
method  of  figuring  annual  production  involves,  one  need 
merely  note  that  if  6  per  cent  had  been  taken  in  computing 
the  income  on  the  pre-war  national  wealth  of  330  billions, 
it  would  have  given  19.8  billions  instead  of  43  billions,  or 
over  13  billions  less  than  what  was  actually  consumed. 

If  we  correct  Tardieu's  figures  by  substituting  13.65 
billions  for  6.3  billions  as  the  loss  in  annual  productive 
power  in  consequence  of  the  reduction  in  capital  equipment, 
we  find  a  total  reduction  in  annual  production  of  19.15  bil- 
lions instead  of  11.8  billions.  And  43  billions  (pre-war 
production)  minus  19.15  billions  equals  23.85  billion  marks 
(present  production),  instead  of  31.2  billions  (Tardieu's 
figures).  If  present  consumption  is  22.9  billions  (Tardieu's 
figures),  it  will  be  seen  that  Germany  can  pay  only  one 
billion  marks  annually. 

M.  Tardieu  says :  "I  do  not  profess  to  be  a  political 
economist.  When  I  quote  statistics  I  put  forward  no  claim 
to  infallibility  of  interpretation,  indeed,  I  am  the  first  to 
call  attention  to  the  coefficient  of  error  they  may  contain.  I 
say  only  that  when  a  man  (referring  to  Keynes)  goes  so  far 
as  to  assert  that  Germany  cannot  pay  in  thirty  years  more 
than  50  billion  francs  at  par  (40  billion  marks),  he  over- 
steps the  limits  of  permissible  tomfoolery  and  is  only  making 
fun  of  Germany's  victims."  ^ 

It  will  be  recalled,  however,  that  in  estimating  the 
reduction    in    German    consumption,    in    consequence    of 

'  Page  328, 


GERMANY'S  ABILITY  TO  PAY  183 

lowered  standards  of  living,  Tardieu  was  conservative — 
assuming  the  reduction  to  be  only  6  billions,  instead  of  one- 
third  of  the  pre-war  consumption,  or  1 1  billions.  Is  he  not, 
therefore,  still  warranted  in  his  conclusion  that  Germany 
has  an  ample  margin  of  production  over  consumption?  For 
if  II  billions  were  used  instead  of  6  billions,  the  present 
consumption  would  be  17.4  billions  instead  of  22.9  billions. 

Such  would  indeed  seem  to  be  the  case  if  one  could 
fairly  assume  that  so  great  a  reduction  in  the  standard  of 
living  carried  with  it  no  impairment  of  productive  power. 
Now  the  truth  is,  as  Tardieu  makes  the  most  of  when  he  is 
thinking  of  France,  but  does  not  admit  when  he  is  thinking 
of  Germany,  that  a  reduction  in  the  standard  of  living  of 
one-third,  or  of  one-fifth  for  that  matter,  is  certain  to  impair 
the  productive  efficiency  of  labor.  The  medical  profession 
everywhere  takes  it  as  a  matter  of  course  that  German 
productive  efficiency,  as  measured  by  labor  power,  has  been 
materially  lessened  as  a  result  of  injuries,  disease,  and 
malnutrition.  Tardieu  utterly  ignores  this  factor  in  the 
German  situation  and  concludes  that  the  decrease  in  German 
man  power  will  not  be  felt  to  any  considerable  extent.  ^ 

It  will  perhaps  serve  to  clarify  one's  views  in  connection 
with  this  whole  issue  if  it  is  recognized  that  if  the  standard 
of  living  has  been  reduced  by  one-third,  it  is  only  because 
the  volume  of  wealth  production  has  been  proportionately 
reduced.  Accordingly,  one  cannot  assume  a  reduction  of 
one-third  in  German  consumption  without  first  assuming  a 
reduction  of  one-third  in  German  production. 

False  Assumption 

Having  seen  that  Tardieu's  corrected  figures  support 
Keynes's  rather  than  his  own  contention,  it  remains  to  be 

'  Page  323- 


l84  THE  REPARATIONS  DILEMMA 

shown  that  his  entire  method  of  computing  a  nation's 
ability  to  pay  is  fallacious  and  proves  nothing  whatsoever. 
The  method  itself  is  derived  from  a  false  analogy.  It  is 
reasoned  that  an  individual's  ability  to  pay  is  measured  by 
the  excess  of  his  income  over  expenditures;  for  example, 
if  a  man's  income  is  $10,000  per  year  and  his  expenditures 
$8,000,  he  can  pay  a  debt  of  $2,000.  Why  is  not  a  nation's 
ability  to  pay  to  be  measured  in  the  same  way  ? 

The  answer  is  that  a  nation's  excess  of  production  over 
consumption  does  not  consist  of  money  which  can  be  turned 
over  to  a  foreign  nation.  When  before  the  war  Germany's 
annual  production  exceeded  her  consumption  by  2  billion 
dollars,  this  did  not  mean  that  Germany  had  2  billions  in 
cash  stowed  away  somewhere.  It  meant  rather  that  there 
was  created  in  Germany  each  year  2  billion  dollars'  worth 
of  new  factories,  equipment,  railroads,  etc. — capital  goods 
which  could  be  thenceforth  used  in  expanding  the  industrial 
output  of  Germany.  New  German  factories,  railroads, 
canals,  highways,  improved  lands,  and  enriched  soil  cannot 
be  turned  over  to  foreign  lands  in  payment  of  reparations. 
In  fact,  a  relatively  small  proportion  of  any  nation's 
ordinary  savings  is  available  as  a  means  of  making  foreign 
payments. 

One  cannot  therefore  assume  that  a  nation's  ability  to 
pay  is  measured  by  the  excess  of  production  over  consump- 
tion. For,  even  if  it  were  true  that  the  excess  was  in  such 
form  that  it  could  be  sent  abroad,  exacting  for  reparation 
payments  the  entire  excess  of  production  over  consumption 
would  mean  that  during  the  time  when  these  payments  were 
being  made  Germany  could  not  be  allowed  to  have  any 
increase  in  her  domestic  capital  equipment.  Germany  would 
have  to  get  on  without  any  improvement  of  her  demoralized 
transportation  system,  without  any  restoration  of  her  mer- 
cantile marine,  without  any  improvement  of  her  agricultural 


GERMANY'S  ABILITY  TO  PAY  185 

resources,  and  without  any  increase  of  factories  and  manu- 
facturing equipment.  Indeed,  if  the  total  excess  of  pro- 
duction over  consumption  were  to  be  employed  in  making 
foreign  payments,  even  replacement  and  maintenance  of 
existing  agricultural  resources,  industrial  equipment,  etc., 
would  have  to  be  foregone.  This  would  of  course  carry 
with  it  a  progressive  diminution  of  Germany's  productive 
capacity. 

True  Measure  of  Ability  to  Pay 

If  one  is  to  measure  German  ability  to  pay,  he  must 
therefore  find  some  other  method  of  computation  than  that 
of  comparing  total  production  with  total  consumption. 
Since  in  the  last  analysis  German  reparations  can  mainly  be 
paid  only  through  the  shipment  of  goods  abroad,  ^  the  cor- 
rect measure  of  German  ability  to  pay  lies  in  the  possible 
excess  of  exports  over  imports.  It  will  prove  instructive 
to  consider  what  would  be  involved  for  German  foreign 
trade  in  making  annual  payments  of  2  billion  marks  plus 
26  per  cent  of  the  total  value  of  German  exports.  The 
following  figures  show  Germany's  foreign  trade  before  the 
war: 

German  imports  in  1913  totaled 11,206,000,000  marks 

German  exports  in  1913  totaled 10,199,000,000     " 

The  balance  of  1.007  billion  marks  was  paid  for  mainly 
by  carrying  foreign  goods  in  German  ships  and  by  interest 
on  German  investments  in  foreign  countries.  It  may  be 
added  that  the  figures  for  191 3  are  typical  for  those  of  a 
number  of  years  before  the  war. 

In  gauging  Germany's  ability  to  pay  the  sum  demanded 
in  the  Allied  terms  of  May,  192 1,  namely,  2  billion  marks 


*  See  discussion  of  this  feature  of  reparations  on  pages  205-206. 


I86  THE  REPARATIONS  DILEMMA 

annually,  plus  26  per  cent  of  the  total  exports,  we  must 
first  consider  what  total  Germany's  exports  may  conceivably 
be  expected  to  reach  in  the  next  few  years.  Since  the  value 
of  gold  has  been  approximately  cut  in  two  since  1913,  prices 
as  expressed  in  terms  of  gold  being  approximately  double 
what  they  were  before  the  war,  ^  if  Germany's  export  trade 
should  in  physical  volume  be  equal  to  what  it  was  before  the 
war  it  would  amount  to  about  20  billion  marks.  But  since 
the  productive  capacity  of  Germany  has,  as  we  have  seen 
above,  been  reduced  by  perhaps  one-third,  it  is  not  reason- 
able to  believe  that  Germany's  export  trade,  even  if  no 
unusual  restrictions  are  placed  upon  it,  could  be  expected  to 
exceed  two-thirds  of  the  pre-war  volume — roughly  13.5 
billions.  Assuming  this  to  be  the  total  of  German  exports 
that  may  develop  within  the  course  of  a  few  years,  2  bil- 
lions of  the  amount  would  go  for  reparations  payments 
direct  and  26  per  cent  of  13.5  billions,  or  3.5  billions,  would 
go  for  reparations  on  account  of  the  26  per  cent  provision 
in  the  reparations  settlement.  This  would  leave  8  billions 
of  imports  to  balance  the  international  account. 

Possibility  of  Increasing  Export  Balance  Sufficiently 

As  a  practical  matter  let  us  now  consider  whether  it  is 
probable  that  Germany  could  export  year  after  year  13.5 
billion  marks'  worth  of  goods  while  importing  only  8 
billion.  ®     Before  the  war,  as  we  have  seen,  Germany  was 


*  If  prices  are  further  reduced,  proportionate  changes  will  have  to 
be  made  in  both  export  and  import  figures. 

*If  one  prefers  other  figures  than  these,  he  may  take,  for  example, 
8  billion  marks  as  the  total  of  exports,  and  4  billion  marks  as  the  total 
imports,  which  would  mean  reparations  payments  of  2  billions,  plus 
another  2  biUions  on  account  of  the  26  per  cent  provision.  Or  if  one 
holds  extravagant  views  as  to  Germany's  exporting  possibilities,  he 
may  assume  total  exports  of  20  billions  and  total  imports  of  13  billions, 
which  would  yield  2  billions  reparations  plus  another  5  billions  on 
account  of  the  26  per  cent  provision.  Whatever  the  amount  taken, 
it  is  obvious  that  the  reparations  can  be  paid  only  by  a  great  excess  of 
exports  over  imports. 


GERMANY'S  ABILITY  TO  PAY  1 87 

able  to  maintain  a  total  volume  of  exports  of  a  little  over 
10  billion  marks  (prices  of  191 3)  by  importing  over  11 
billion  marks'  worth  of  goods.  At  the  present  time  Ger- 
many has  little  shipping  with  which  to  carry  world  traffic, 
and  hence  cannot,  as  heretofore,  pay  for  imports  through 
freight  service.  Moreover,  Germany's  investments  in 
foreign  lands  have  largely  ceased  to  exist,  with  the  result 
that  there  is  no  longer  interest  due  which  can  be  used  to 
pay  for  the  excess  of  imports.  Accordingly,  it  would  seem 
that  Germany's  imports  would  tend  to  be  reduced  for  lack 
of  the  usual  means  of  payment. 

If  in  addition  2  billion  marks  annually,  plus  26  per  cent  of 
the  total  exports,  are  no  longer  to  be  available  as  a  means  of 
purchasing  imports,  it  will  be  seen  that  Germany  in  fact 
will  have  serious  difficulty  in  maintaining  her  import  trade. 
It  would  seem,  therefore,  altogether  probable  that  German 
importations  might  well  decline  from  the  11  billions  total 
before  the  war  to  the  8  billions  total  suggested  above.  "^ 

But  if  it  turns  out  that  Germany  can  import  only  8  bil- 
lions, one  must  then  raise  the  question  whether  under  such 
circumstances  she  may  be  expected  to  export  as  much  as 
13.5  billions,  as  would  be  required  to  pay  the  reparations. 
Can  Germany  by  any  conceivable  means  maintain  a  volume 
of  exports  equal  to  13.5  billions  when  imports  are  reduced 
to  8  billions?  Most  of  Germany's  staple  articles  of  exports 
can  be  produced  at  all  only  where  raw  materials,  or  a  large 
part  of  them,  have  been  previously  imported.  Germany's 
principal  exports  before  the  war  were  iron  and  steel, 
machinery,  coal  and  coke,  woolen  goods,  and  cotton  goods. 
With  the  exception  of  coal  and  coke,  the  exports  of  which 
have  been  greatly  reduced  because  of  the  loss  of  Lorraine, 
importations  of  raw  material  are  in  every  case  prerequisite  to 


For  German  figures  for  the  year  1920,  see  pages  194-195. 


l88  THE  REPARATIONS  DILEMMA 

manufacturing  these  principal  articles  of  export.  How  is 
Germany  to  secure  the  necessary  raw  materials  when  denied 
the  opportunity  of  paying  for  them  in  the  usual  way,  that  is, 
by  means  of  exports? 

All  students  of  international  trade  and  finance  will  doubt- 
less agree  that  Germany  can  maintain  a  volume  of  exports 
such  as  has  been  suggested,  only  provided  her  total  imports 
approach  this  volume.  And  they  will  also  doubtless  agree 
that  such  a  total  of  imports  can  be  secured  only  in  case 
Germany  is  extended  liberal  credits  by  the  nations  which 
possess  the  necessary  raw  materials.  Now  whether  Ger- 
many will  be  granted  the  requisite  credits  in  France,  Eng- 
land, and  the  United  States,  or  elsewhere,  will  depend  in 
part  upon  the  condition  of  the  Allied  financial  markets. 
That  is  to  say,  it  will  depend  upon  the  ability  of  investors 
in  Allied  nations  to  absorb  German  securities  at  a  time 
when  the  investment  markets  are  already  congested  with 
securities  growing  out  of  war  debts  and  the  exigencies  of 
post-war  corporate  financing,  not  to  mention  the  reparations 
bonds  themselves,  which,  as  we  shall  see,  France  hopes  to 
sell  to  investors.  ^  It  will  depend  even  more  upon  American 
willingness — for  America  is  now  the  chief  lending  nation — 
to  risk  funds  in  loans  to  Germany  at  a  time  when  Germany 
is  already  burdened  with  the  obligations  incident  to  the 
reparations  settlement.  It  should  be  remembered  in  this 
connection  that  German  bonds  would  have  to  compete  in 
our  markets  both  against  the  bonds  of  other  countries  and 
against  those  of  our  own  corporate  enterprises.  It  is 
problematical,  to  say  the  least,  whether  Germany  can  secure 
the  credit  necessary  to  maintain  her  import  trade. 

One  further  possibility  is,  however,  open  to  Germany. 
If  in  the  course  of  time  she  can  reorganize  the  industrial 


See  analysis  on  page  218. 


GERMANY'S  ABILITY  TO  PAY  I89 

resources  of  Russia,  the  Balkans,  and  the  Near  East,  she 
might,  over  a  period  of  years,  secure  there  the  necessary 
materials  with  which  to  pay  large  reparations. 

Other  Factors 

While  speculation  as  to  Germany's  ability  to  pay  is  in- 
teresting and  informative,  when  all  is  said  and  done  it  is 
impossible  to  determine  with  any  degree  of  accuracy  the 
precise  amounts  that  might  conceivably  be  paid  in  the  long 
run.  So  much  depends  upon  factors  that  cannot  now  be 
gauged.  The  productive  power  of  a  nation  and  its  export- 
ing ability  are  not  fixed  merely  by  the  number  of  its 
inhabitants,  the  number  of  square  miles  of  territory,  or  the 
number  of  factories  and  railroads.  Under  favoring  condi- 
tions the  industrial  machine  by  means  of  which  national 
wealth  is  produced  may  attain  a  very  high  rate  of  output; 
but  under  unfavorable  conditions  the  total  volume  of 
production  will  be  relatively  small.  The  modern  economic 
world,  as  we  have  seen,  is  adjusted  with  very  great  delicacy, 
and  in  consequence,  if  a  maximum  output  of  wealth  is  to  be 
produced,  all  parts  of  the  financial  and  industrial  mechanism 
must  work  smoothly  together  for  the  end  in  view.  It  is  not 
enough  to  say  that  all  Germany  need  do  is  to  give  up  re- 
calcitrancy and  get  down  to  work — produce  much  and  con- 
sume little.  The  volume  of  work  that  will  be  available  for 
the  German  population  will  in  fact  depend  largely  upon 
German  ability  to  secure  in  the  markets  of  the  world  the 
raw  material  necessary  for  her  manufacturing  processes, 
and  in  turn,  upon  having  free  access  to  the  markets  of  the 
world  for  the  sale  of  the  excess  products  of  her  energy.  * 

Given  favoring  conditions  with  reference  to  credits  in 
foreign   countries,   given   freedom    from   external   control 


•  See  in  this  connection  the  analysis  on  pages  141-144. 


190  THE  REPARATIONS  DILEMMA 

either  in  the  form  of  military  occupation  or  of  trade  restric- 
tions, given  free  ingress  to  foreign  markets  in  the  sale  of  her 
products,  given  access  to  the  economic  resources  of  Russia 
and  southeastern  Europe,  through  economic  alliances  with 
those  countries,  and  given  time  to  rehabilitate  the  industrial 
organization  of  the  country,  Germany  could  doubtless  pay 
a  very  great  deal.  That  is  to  say,  she  could  do  so  provided 
her  financial  system  did  not  collapse  under  the  strain  to 
which  it  has  been  and  would  continue  to  be  subjected. 
The  German  budgetary  situation  and  the  condition  of  the 
Reichsbank,  discussed  in  previous  chapters,  give  little  assur- 
ance in  this  connection. 

In  the  light  of  these  considerations  we  are  convinced 
that  Keynes's  estimate  of  a  total  of  40  billion  gold  marks 
as  the  maximum  amount  that  Germany  might  reasonably  be 
expected  to  pay  over  a  period  of  years,  is  a  very  generous 
one. 

Reparations  and  the  German  Budget 

A  word  more  should  be  said  at  this  place,  however,  with 
reference  to  the  budgetary  situation.  What  will  be  the  effect 
of  the  reparations  payments  upon  the  fiscal  operations  of  the 
German  government?  We  have  seen  that  if  Germany  is  to 
pay  she  must  do  so  through  exporting  goods  to  foreign 
countries;  for — it  bears  repeating — only  by  so  doing  can 
she  derive  the  power  to  draw  bills  of  exchange  which  can  be 
handed  over  to  the  Reparations  Commission  for  distribution 
among  the  nations  which  are  to  receive  the  payments.  But, 
since  it  is  private  individuals  who  export  the  goods  and 
draw  the  bills  of  exchange  against  them,  some  means  must 
be  provided  whereby  the  government  of  Germany  can  get 
j)ossess!on  of  these  tangible  means  of  payment.  The  repara- 
tions settlement  provides  that  this  should  be  done  by  taxa- 
tion.   It  requires  that  the  German  government  shall  assign : 


GERMANY'S  ABILITY  TO  PAY  19 1 

( I )  the  proceeds  of  all  German  maritime  and  land  customs 
and  duties,  and,  in  particular,  the  proceeds  of  all  import  and 
export  duties;  (2)  the  proceeds  of  the  levy  of  25  per  cent 
on  the  value  of  all  export  and  import  duties,  except  those 
exports  upon  which  a  levy  of  not  less  than  25  per  cent  is 
applied  under  the  legislation  of  any  Allied  Power.^® 

It  will  thus  be  seen  that  reservation  of  the  most  im- 
portant sources  of  indirect  taxation  are  regarded  as  neces- 
sary for  the  purpose  in  hand ;  and  rightly  so,  in  view  of  the 
huge  amount  of  the  annual  reparation  payments  that  must 
be  made.  Assuming  that  the  payments  to  be  made  amount 
to  4  billion  marks  annually,  ^^  let  us  see  what  this  means  in 
the  way  of  taxes. 

Four  billion  marks  in  gold  represents,  in  terms  of  Ger- 
man currency  at  the  present  rate  of  exchange,  some  65 
billion  marks.  ^^  This  works  out  at  a  tax  rate  on  the  total 
German  income  of  from  1 5  to  20  per  cent,  which  alone  would 
require  as  high  a  rate  of  taxation  as  France  is  willing  to 


"This  exception  is  of  negligible  importance.  It  had  reference  to  the 
British  Recovery  Act  of  1921,  levying  a  tax  of  50  per  cent  upon  Ger- 
man exports  into  Great  Britain.  The  idea  involved  was  that  the  British 
government  would  collect  this  tax  and  thus  get  paid  by  the  German 
exporter,  who  would  have  to  recoup  by  means  of  an  export  bonus 
from  the  German  government.  Professor  Cassell  has  observed  that 
from  the  point  of  view  of  the  German  exporter  this  really  amounted 
to  a  100  per  cent  tax.  If,  for  example,  £100,000  of  German  goods  were 
imported,  the  British  government  would  get  £50,000,  leaving  £50,000 
to  the  exporter.  The  tax  would  thus  be  100  per  cent  of  what  the 
German  exporter  got;  that  is  to  say,  he  would  be  taxed  this  amount 
if  he  could  not  collect  it  from  his  government.  As  a  practical  matter 
he  could  not  count  upon  this ;  hence  he  would  not  be  willing  to  export 
to  Great  Britain,  unless  he  could  add  the  amount  of  the  tax  to  his 
selling  price.  In  such  cases,  it  will  be  noted,  it  would  be  the  British 
public  which  would  really  pay  the  German  reparations.  It  is  con- 
siderations such  as  these  which  recently  led  to  a  reduction  of  the  rate 
from  50  per  cent  to  26  per  cent  and  a  virtual  abandonment  of  the 
entire  scheme. 

"  Recall  the  discussion  in  footnote  on  page  186. 

"This  figure  was  approximately  correct  in  June,  1921.  Since  then, 
however,  the  mark  has  fallen  heavily  in  value  and  the  figure  is  now 
greatly  in  excess  of  65  billions.  It  is  impossible  for  the  authors  to 
keep  their  figures  up  to  date,  so  rapid  is  the  fall  in  marks. 


192  THE  REPARATIONS  DILEMMA 

bear;  although  it  is  not  high  as  the  British  rate.  But  besides 
this,  Germany  has  all  her  other  national  expenditures  to 
meet.  As  previously  seen,  the  preliminary  estimates  for 
1921  call  for  expenditures  of  no  billion  paper  marks,  and 
revenues  of  40  billion  paper  marks.  Although  these  figures, 
as  we  found  in  the  discussion  of  the  German  budget  in 
Chapter  V,  are  neither  inclusive  nor  final,  they  will  serve 
our  present  purpose  well  enough. 

Germany  may  balance  her  budget  in  either  one  of  two 
ways :  She  may  increase  her  revenue  from  40  billion  to 
175  billion  paper  marks,  the  amount  of  the  present  ex- 
penditures (no  billions)  plus  reparations  (65  billions);  or 
she  may  increase  her  revenues  from  40  billions  to  120  bil- 
lions and  decrease  her  domestic  expenditure  from  no  to  55 
billions,  thus  leaving  65  billions  for  reparations — that  is  to 
say,  triple  her  revenues  and  halve  her  expenses. 

The  per  capita  income  of  the  United  States  has  recently 
been  computed  at  $620.  The  League  of  Nations'  estimate 
for  Germany  is  $104  per  capita.  It  will  be  helpful  to  Ameri- 
cans, in  appraising  the  German  financial  situation,  to  con- 
sider whether  they  think  the  Secretary  of  the  Treasury  of 
the  United  States,  even  with  our  greater  wealth  and 
relatively  much  lower  tax  burden,  would  find  it  possible  to 
treble  the  national  revenue  and  cut  the  federal  appropria- 
tions in  two,  without  seriously  impairing  the  business  and 
social  morale  of  the  country. 

Reparation  Paradoxes 

But  people  read  of  the  enormous  paper  profits  made  in 
Germany  from  both  speculative  and  industrial  ventures  and 
still  remain  incredulous.  The  Germans,  it  is  widely  believed, 
were  never  so  prosperous,  never  so  able  to  pay  as  now. 
They  should  be  compelled  to  restrict  their  purchases  of 
luxuries,  to  tighten  their  belts  and  their  teeth,  and  to  save 


GERMANY'S  ABILITY  TO  PAY  193 

as  no  people  was  ever  compelled  to  save  before.  This 
sentiment  is  altogether  laudable;  but  unfortunately  its 
realization  is  not  so  simple  as  it  seems. 

In  the  first  place,  certain  Allied  industries  do  not  want 
Germany  to  restrict  her  consumption  of  luxuries,  which  are 
largely  imported  from  Allied  nations.  The  result  of  Ger- 
man abstention  from  luxuries  would  be  depression  and 
unemployment  in  the  Allied  luxury  trades.  The  Allies  must 
either  permit  Germany  to  buy  luxuries  or  suffer  from  the 
consequences.  This  is  only  one  of  many  humorous 
paradoxes  in  the  reparations  controversy.^^  As  a  matter 
of  fact,  the  reparations  ultimatum  requires  the  fulfilment 
of  various  treaty  provisions,  among  which  is  the  stipulation 
that  German  duties  on  imports  of  Allied  luxuries  shall  not 
be  increased. 

In  this  connection  it  is  also  interesting  to  know  that  for 
fiscal  reasons  the  German  government  has  since  the  war 
created  a  monopoly  of  spirituous  liquors  from  which  very 
large  government  revenues  are  derived.  The  Allies,  how- 
ever, have  been  unwilling  to  allow  this  monopoly  to  operate 
in  the  occupied  territory,  because  they  have  wished  to  sell 
their  own  cognacs  and  liquors  there.  Indeed,  in  direct 
opposition  to  German  government  policy  the  Allies  have 
kept  open  the  so-called  "hole  in  the  west"  for  the  purpose 
of  allowing  Allied  luxuries  of  practically  every  description 
to  leak  through  and  be  sold  in  Germany.  It  should  be  added 
that  in  the  rapprochement  effected  this  summer  between 
France  and  Germany  ^'*  a  compromise  was  reached  as  to  the 
amount  of  French  luxuries  which  Germany  would  officially 
permit  to  be  imported.  The  net  result  will  probably  be  an 
increase  in  the  sale  of  Allied  luxuries  in  Germany. 

In  the  second  place,  the  tightening  of  the  belt  among  the 


"  Others  will  be  disclosed  in  the  following  chapter. 
^*  See  Chapter  XVI. 


194  THE  REPARATIONS  DILEMMA 

rank  and  file  in  Germany  can  be  accomplished  only  by  the 
imposition  of  high  indirect  taxes.  It  is  extremely  doubtful 
whether  a  social  democratic  government  can  be  induced  to 
increase  materially  its  indirect  taxes  when  the  masses  of 
people  already  find  their  standards  of  living  far  below  pre- 
war levels.  Some  increase  is  conceivable ;  but  no  substantial 
raising  of  indirect  taxes  is  to  be  expected. 

German  taxes  of  other  sorts  can  doubtless  be  increased 
somewhat,  provided  the  process  of  inflation  and  profiteer- 
ing continues.  While  the  income  tax  rate  is  already  up  to 
60  per  cent  on  the  largest  incomes  and  cannot  be  increased 
much  more,  it  is  expected  that  other  sources  of  revenue  may 
be  further  utilized.  The  German  government  is  now,  in 
fact,  drafting  a  new  revenue  bill.  Among  the  added  taxes 
being  considered  are :  a  sugar  tax,  a  monopoly  of  sweeten- 
ing materials,  alterations  of  the  brandy  monopoly,  a  new 
corporation  tax,  taxes  on  racing  bets,  matches,  tobacco, 
beer,  and  mineral  waters,  a  new  capital  tax,  an  insurance 
tax,  a  further  turnover  tax,  and  a  tax  on  power  vehicles. 

Germany,  however,  will  not  be  able,  even  with  these 
taxes,  to  balance  her  budget. 

Present  Ability  to  Pay 

We  have  been  considering  the  factors  which  will  govern 
Germany's  ability  to  pay  over  a  period  of  years;  and  neces- 
sarily we  have  been  in  some  degree  in  the  realm  of  the 
speculative.  In  concluding  this  analysis  we  cannot  there- 
fore do  better  than  to  compute  the  present  capacity  of  Ger- 
many to  pay.  This  can  be  done  by  a  citation  of  German 
foreign  trade  figures.  German  trade  figures  have  not  been 
published  regularly  since  the  war.  But  for  the  year  1920, 
according  to  estimates  made  by  Sir  George  Paish,  the  well- 
known  English  authority  on  international  trade,  on  the 
basis  of  data  supplied  by  the  German  embassy  in  London, 


GERMANY'S  ABILITY  TO  PAY  195 

they  were  approximately  as  follows :  imports  8  billion  gold 
marks;  exports  5  billion  gold  marks.  The  adverse  balance 
was  thus  3  billion  gold  marks,  not  counting  the  "invisible 
items,"  which  were  also  heavily  against  Germany.  Under 
the  terms  of  the  present  settlement  Germany  would  have 
owed,  for  1920,  the  sum  of  2  billion  plus  1.3  biUion  gold 
marks;  and  she  could  have  paid  none  of  it  out  of  current 
income,  that  is,  out  of  an  excess  of  exports.  On  the  con- 
trary, Germany  went  further  into  debt  in  order  to  procure 
imports.  These  imports,  it  may  be  interesting  to  note, 
were  largely  loaned  to  Germany  by  those  who  were  speculat- 
ing in  German  marks. 

But  is  not  Germany  just  getting  Into  her  stride,  and  will 
not  the  volume  of  exports  In  the  year  1921  greatly  exceed 
the  volume  of  Imports?  There  are  many  stories  afloat  to 
the  effect  that  Germany  is  now  the  most  prosperous  nation  in 
the  world,  that  her  people  are  working  like  beavers  twelve 
hours  a  day,  that  German  costs  have  been  reduced  to  a  point 
where  Germany  can  undersell  her  competitors  in  every 
market  In  the  world.  Investigation  always  shows,  however, 
that  these  stories,  like  the  accounts  of  Mark  Twain's  death, 
are  greatly  exaggerated.  In  consequence  of  continued  infla- 
tion, Germany  felt  somewhat  later  than  other  nations  the 
effect  of  the  world-wide  depression.  But  she  is  feeling  It 
now,  severely.  The  Federal  Reserve  Bulletin  for  May, 
1 92 1,  contains  a  summary  of  conditions  In  Germany  which 
shows  an  increasing  volume  of  unemployment  and  increas- 
ingly disturbed  business  conditions.  The  following  sum- 
mary statement  relating  to  Germany,  taken  from  Cox  and 
Company's  (English  bankers)  monthly  review  of  business 
conditions  for  May,  is  conclusive : 

"The  uncertainty  of  the  political  and  economic  outlook 
accentuates  the  unfavourable  conditions  in  trade  and  In- 
dustry.     The   metal   and   engineering   industries    report    a 


196  THE  REPARATIONS  DILEMMA 

substantial  set-back.  The  Metal-Workers'  Union,  which 
embraces  approximately  2,000,000  members,  states  that  at 
the  beginning  of  May  more  than  10  per  cent  had  been  out 
of  work  or  put  on  short  time.  In  the  electrical  industry  the 
unsatisfactory  financial  status  of  the  'Reich,'  the  Federal 
States,  and  of  most  large  municipalities,  makes  itself  more 
and  more  felt  in  the  lack  of  large  orders  for  new  plants  and 
engines.  Only  motor  construction  has  a  comparatively  good 
stock  of  orders  on  hand.  With  the  exception  of  some 
specialties,  the  chemical  industry  likewise  reports  a  slowing 
down.  The  shoe  industry  is  one  of  the  few  branches  which 
are  at  present  enjoying  good  times." 

If  more  is  needed  to  convince  the  doubting  ones,  it  may 
be  found  in  the  British  Board  of  Trade  Journal  for  June 
16,  1 92 1,  which  concludes  a  summary  of  conditions  in 
south  Germany,  as  follows :  "The  picture  of  Bavarian 
industry  as  a  whole  is  one  of  deep  gloom  and  uncertainty 
as  to  the  future." 

There  appears,  however,  to  have  been  a  little  improve- 
ment in  July,  attributable  primarily  to  an  increase  of  sub- 
sidies designed  to  stimulate  exports  with  a  view  to  meeting 
reparation  payments. 

German  Competition 

Much  has  of  late  been  said  of  Germany's  ability  to 
produce  goods  so  cheaply  that  German  competition  in  world 
markets  is  certain  to  prove  utterly  ruinous  to  Allied 
industries.  In  so  far  as  Germany's  foreign  trade  has  been 
receiving  an  impetus,  it  is  largely  attributable  to  subsidies. 
For  example,  the  railroads  of  Germany  were  last  year  con- 
ducted at  a  deficit  of  more  than  9  billion  paper  marks,  to  the 
end  that  freight  rates  might  be  kept  down  and  trade  thereby 
stimulated.  In  similar  fashion,  German  ship-owners  have 
been  granted  large  subsidies  as  compensation  for  their  ton- 


GERMANY'S  ABILITY  TO  PAY  197 

nage  which  was  seized  for  payment  to  the  Allies.  The 
government  has  bound  the  ship-owners  to  complete  in 
German  shipyards  within  the  course  of  five  years  2 5^  mil- 
lion tons  of  shipping,  i.e.,  one-third  of  Germany's  former 
mercantile  fleet.  Coal  and  raw  materials  prices  are  also 
kept  down  by  law  in  order  that  the  cost  of  production  may 
be  low,  and  it  has  also  been  found  possible  to  keep  wages 
down  by  controlling  the  prices  of  bread.  But  all  these 
efforts  to  stimulate  trade  are  artificial,  and  the  consequences 
are  manifested  indirectly.  All  subsidies  must  be  shouldered 
by  the  government;  and  they  thus  indirectly  fall  back  upon 
the  masses  either  in  the  form  of  taxes  or  further  govern- 
ment deficits  that  require  additional  resort  to  the  prmting 
press.  The  price  that  Germany  pays  for  her  relatively 
lower  costs  of  production  is  progressive  demoralization  of 
the  financial  system. 

It  is  true,  as  we  have  seen  in  the  chapter  on  foreign 
exchange,  that  the  great  depreciation  of  the  mark  makes 
Germany  one  of  the  best  markets  in  the  world  in  which  to 
buy.  This  is  because  the  increase  in  money  costs  of  pro- 
duction in  Germany  does  not  quite  keep  pace  with  the  fall 
in  the  value  of  the  mark.  This  "lag"  is,  however,  in  the 
main  attributable  to  the  subsidies  just  mentioned.  Just  as 
soon  as  subsidies  are  discontinued  and  the  real  costs  of  pro- 
duction are  placed  where  they  belong,  the  export  advantage 
now  enjoyed  by  Germany  will  in  large  measure  disappear. 
It  will  also  disappear  ^^  as  soon  as  the  German  financial 
system  breaks  down  under  the  strain  to  which  present 
financial  requirements  are  subjecting  it.  Even  as  it  is, 
Germany  is  reaping  no  great  advantage  from  the  situation. 


"It  may  not  wholly  disappear,  however;  Germany  still  possesses  an 
advantage  as  compared  with  the  Allies  insofar  as  she  can  import  mate- 
rials from  countries  to  the  east,  whose  currencies  are  depreciated  even 
as  compared  with  her  own,  and  export  to  countries  whose  exchanges 
are  at  a  premium. 


198  THE  REPARATIONS  DILEMMA 

There  have  been  repeated  difficulties  of  late  in  making 
deliveries  at  the  prices  agreed  upon  in  desperation;  the 
rapid  mounting  of  prices  continually  has  upset  the  cost 
computations  of  manufacturers.  The  figures  of  German 
exports,  moreover,  show  conclusively  that  Germany  is  not 
profiting  much  from  this  condition,  because  of  inability  to 
import  the  necessary  raw  materials  and  inability  to  produce 
in  excess  of  necessary  domestic  requirements.  According 
to  present  indications,  Germany's  exports  in  1921  will  not 
greatly  exceed  those  of  1920,  and  will  still  be  materially 
less  than  the  total  of  imports. 

How  Germany  is  Now  Paying 

But  Germany  is  already  paying,  it  is  answered;  there 
is  obviously  something  fallacious  in  theories  of  German 
inability  to  pay,  put  forward  in  the  face  of  the  in- 
controvertible fact  that  since  the  German  government 
accepted — under  the  threat  of  Allied  occupation — the  terms 
of  the  May  ultimatum,  reparations  payments  have  been  met 
promptly  and  in  full.  Moreover,  has  not  Dr.  Walter 
Rathenau,  the  German  Minister  of  Reconstruction,  officially 
admitted  that  Germany  can  and  will  meet  the  obligations 
imposed  upon  her? 

With  reference  to  the  Rathenau  statement,  it  must  be 
remembered  that  the  previous  German  government  fell 
because  of  its  refusal  to  concede  the  possibility  of  making 
the  payments  demanded.  Dr.  Rathenau  accepted  his  post 
under  a  new  government  whose  declared  policy — one  might 
say  whose  only  policy — was  to  make  every  effort  to  fulfil 
the  reparation  demands.  Under  these  circumstances  one 
would  hardly  expect  that  his  first  official  announcement 
would  be  that  Germany  could  not  pay.  The  obvious  inten- 
tion in  his  announcement  that  Germany  could  and  would 
pay  was  to  convince  the  Allied  governments  that  a  bona 


GERMANY'S  ABILITY  TO  PAY  199 

fide  attempt  to  meet  the  terms  of  the  settlement  would  be 
made.  Incidentally,  it  may  be  noted  here  that  M.  Briand 
himself  was  among  the  first  courageously  to  recognize,  in 
the  face  of  bitter  parliamentary  opposition,  that  the  new 
German  government  was  honest  and  sincere  in  its  efforts  to 
fulfil  the  terms  of  the  Allied  demands. 

Now  let  us  see  precisely  how  the  German  pa3mients  since 
May,  192 1,  have  been  made.  As  shown  in  Chapter  XII, 
the  ultimatum  required  a  payment  of  one  billion  gold  marks 
for  the  first  half-year,  the  26  per  cent  requirement  being 
omitted  for  this  period.  By  June  6,  Germany,  as  required, 
had  paid  the  equivalent  of  150  billion  gold  marks  and  given 
three  months'  Treasury  notes  for  850  billion  gold  marks, 
due  September  i.  This  latter  sum  was  paid  in  full  on  that 
date. 

These  sums  have  not,  however,  been  paid  out  of  income, 
that  is,  out  of  an  excess  of  exports  over  imports.  They  have 
been  paid  in  the  main  out  of  capital  and  through  new  bor- 
rowing. Concretely,  Germany  has  met  these  payments 
mainly  in  the  following  ways :  ( i )  by  mobilizing  remnants 
of  investments  and  assets  owned  in  various  parts  of  the 
world ;  ( 2 )  by  selling  paper  marks  wherever  naive  specula- 
tors therein  could  still  be  found;  (3)  by  negotiating  loans  in 
Holland,  England,  and  the  United  States.  These  resources 
did  not,  however,  prove  sufficient  to  meet  the  September 
payments.  Although  the  printing  presses  were  worked 
overtime  and  the  government  poured  out  paper  money  like 
water,  3  billion  marks  being  added  to  the  outstanding  note 
issues  of  the  Reichsbank  in  the  last  week  of  August  alone, 
it  was  in  the  end  found  necessary  to  cut  into  the  already 
hazardously  slender  reserve  of  the  Reichsbank  and  part  with 
68  million  marks  in  gold. 

Each  of  these  means  of  payment  is  a  rapidly  diminishing 
and  quickly  exhausted  one.    Indeed,  the  desperate  expedient 


200 


THE  REPARATIONS  DILEMMA 


of  Utilizing  Reichsbank  gold  reserve  is  evidence  that  all 
other  means  were  exhausted  in  August.  None  of  them  can 
be  counted  upon  again  to  furnish  any  substantial  sums. 
The  entire  remaining  gold  supply  of  Germany  is  not  suffi- 
cient to  meet  the  next  half-year's  payments  of  one  billion 
gold  marks,  plus  26  per  cent  of  Germany's  total  exports. 
If  the  gold  is  used,  moreover,  German  financial  collapse 
within  the  year  is  assured.  If  it  is  not  used  nothing  is 
more  certain  in  this  uncertain  world  than  that  Germany 
will  be  in  default  on  the  payments  to  which  she  is  now  com- 
mitted within  twelve  months. 

The  accompanying  graph  shows  the  fate  of  the  German 
mark  since  May  8,  the  date  on  which  Germany  agreed  to  f  ul- 


Per 
cent 


110 


100 


90 


80 


70 


60 


50 


V'X — 


Pounds  Sterling 


lV 


x: 


.  German  Markt 


yv^/v 


Y 


X 


May 


June 


July 


Aug. 


Sept. 


Per 
cent 


110 


100 


90 


80 


70 


60 


50 


Exchange  Rates  as  Affected  by  Reparations  Payments 


fil  the  Allied  terms.    The  meteoric  fall  of  the  mark  is  largely 
attributable  to  the  reparation   requirements.     The  effects 


GERMANY'S  ABILITY  TO  PAY  20I 

upon  Allied  commerce  and  industry  of  such  violent  gyra- 
tions of  the  exchanges  will  be  discussed  in  Chapter  XIV. 

It  is  contended  that  if  Germany  only  ceased  printing 
paper  marks  with  which  to  meet  reparations,  and  resorted 
instead  to  an  internal  bond  issue,  the  reparations  could  be 
paid  without  serious  difficulty.  The  borrowing  fallacy  thus 
crops  up  again.  If  the  government  sells  additional  bonds 
at  home,  it  merely  increases  the  total  interest  to  be  paid, 
and  its  deficit  will  be  further  increased.  Moreover,  the 
sale  of  government  bonds  carries  no  assurance  that  the  vol- 
ume of  currency  would  not  be  increased.  For  the  buyers  of 
the  bonds  would  undoubtedly  borrow  a  considerable  portion 
of  the  funds  from  banks,  as  was  done  in  every  country  dur- 
ing the  war.  This  may  be  the  lesser  of  the  evils ;  but  it  is  no 
solution  of  the  problem.  Recent  attempts  to  place  the  credit 
of  great  industrial  interests  back  of  the  government  have  the 
same  point  of  weakness.  Finally,  assuming  the  government 
thus  gets  funds,  the  problem  of  securing  an  excess  of  exports 
over  imports  still  remains  the  fundamental  difficulty. 

Could  Britain  Pay  the  Reparations? 

Official  statistics  of  Great  Britain's  foreign  trade  and 
financial  operations  prove  that  even  she  could  not  pay  out 
of  current  income  the  amount  of  the  German  reparations. 
The  data  which  follows  are  for  the  calendar  year  1920.^*^ 

Trade  Items  "Invisible  Financial  Items" 

Imports  of  merchandise  £1,936,800,000  Interest   from    foreign  in- 

Exports  of  merchandise .  1,558,000,000            vestments £120,000,000 

Excess  imports  of  mer-        Income  from  shipping  ser- 

chandise £378,800,000            vices 340,000,000 

Excess  of  exports  of  bul-  Profits  from  banking  and 

lion  and  coin 43,500,000            other  services 40,000,000 


Excess  of  imports £335,300,000        Total  "invisible  items".  ..      £500,000,000 

Net  balance  in  favor  of  Great  Britain..  .  .£165,000,000 


"Data   taken   from   London   Joint   City  and   Midland   Bank,   Ltd., 
Monthly  Revieiv,  February,  1921,  page  2. 


202  THE  REPARATIONS  DILEMMA 

Now  £165,000,000  equals  3.2  billion  gold  marks. ^'^ 
Under  the  terms  of  the  reparations  settlement  there  must  be 
paid  each  year  2  billion  gold  marks  plus  26  per  cent  of  the 
total  exports.  Since  Great  Britain's  total  merchandise  ex- 
ports were  £1,558,000,000,  or  roughly  32  billion  gold  marks, 
the  total  indemnity  would  have  amounted  to  10  billion  gold 
marks.  Great  Britain  had  3,200,000,000  marks  of  net 
favorable  balance  with  which  to  pay  10  billions  of  repara- 
tions. Add  to  this  the  total  gold  supply  of  the  Bank  of 
England,  approximately  2.5  billion  marks,  and  Great  Britain 
could  have  paid  only  about  60  per  cent  of  the  year's  require- 
ments. Moreover,  in  view  of  the  business  boom  and  the 
skyrocketing  of  prices,  the  year  1920  was,  in  terms  of 
money  values,  as  good  a  year  as  England  may  expect  to  have 
in  a  generation. 

Great  Britain,  it  is  true,  could  have  paid  the  amount 
out  of  capital — through  the  utilization  of  foreign  securities 
for  the  purpose.  Such  a  procedure,  however,  even  in  the 
case  of  Great  Britain,  would  quickly  reach  an  end.  Resort 
to  it  would,  moreover,  rapidly  reduce  the  balance  in  Britain's 
international  income  account  out  of  which  subsequent  annual 
payments  would  have  to  be  made.  Income  alone  constitutes 
a  permanent  source  of  reparations.  And  out  of  income 
Great  Britain  herself  could  have  paid  in  the  excellent  year 
1920  only  about  one-third  of  the  requirements  imposed 
upon  Germany. 


"  This  is  on  the  assumption  that  sterling  was  at  par.  Since  sterling 
was  depreciated  about  25  per  cent,  the  amounts  that  Britain  could  pay 
are  here  somewhat  exaggerated. 


CHAPTER  XIV 

HOW  MUCH  ARE  THE  ALLIES  WILLING  TO  BE 

PAID? 

Means  of  Payment 

In  all  the  voluminous  discussions  of  the  reparations  issue 
there  has  been  the  greatest  confusion  of  mind  as  to  what  is 
involved  in  the  payment  of  reparations.  On  the  part  of 
both  Allies  and  Germany  official  attention  has  always  been 
centered  upon  the  amounts  to  be  paid,  and  these  amounts 
have  always  been  expressed  in  terms  of  money.  The  im- 
plication has  almost  always  been  that  Germany  is  to  pay  the 
reparations  demanded  primarily  with  money,  just  as  indi- 
viduals meet  their  obligations  by  a  transfer  of  money.  In 
the  official  discussions  of  reparations  the  truth  has  never 
been  set  forth,  either  by  the  Allies  or  by  Germany,  that  only 
an  infinitesimal  part  of  the  total  sums  under  consideration 
could  possibly  be  paid  in  actual  money. 

While  the  Treaty  of  Peace  stipulated  that  certain  prop- 
erty and  goods,  such  as  ships,  coal,  cattle,  rolling  stock, 
etc.,*  should  be  surrendered  by  Germany,  and  while  there 
have  been  treaty  provisions  and  suggestions  that  Germany 
should  furnish  certain  materials  for  the  reconstruction  of 
the  devastated  areas,  the  contemplated  payments  in  kind  con- 
stituted but  a  mere  fraction  of  the  total  sums  stipulated. 
The  greater  part,  it  was  thought,  should  be  paid  in  money 
or  funds.  Evidence  of  this  contemplation  is  to  be  found  in 
the  history  of  reparations.  The  controversies  have  all 
centered  around  the  question  as  to  whether  Germany  should 


*  See  list  of  payments  in  kind  on  pages  171-172. 

203 


204  THE  REPARATIONS  DILEMMA 

in  justice  be  compelled  to  do  more  than  provide  for  the 
physical  reconstruction  of  devastated  areas;  whether  she 
should  not  be  compelled  to  provide  money  for  Allied  pen- 
sions and  for  defraying  the  entire  costs  of  the  war.  The 
argument  is  that  Allied  budgets  are  to  be  relieved  by  the 
receipt  of  German  reparation  money. 

The  experience  of  the  Reparations  Commission  and 
Allied  governments  with  the  practical  administration  of 
reparations  during  the  last  three  years  has  developed  two 
distinct  and  opposing  doctrines.  In  the  first  place,  it  has 
partly  dawned  on  the  statesmen  of  Europe  that  somehow  or 
other  it  appears  to  be  necessary  to  allow  Germany  to  pay 
at  least  a  considerable  part  of  the  reparations  demanded  in 
commodities.  We  say  that  this  has  "partly  dawned"  on  the 
statesmen  of  Europe  for  judging  from  their  public  utter- 
ances the  mists  have  even  yet  not  entirely  cleared  away. 

In  the  second  place,  it  has  apparently  fully  dawned  upon 
these  statesmen  that  the  business  interests  within  their 
respective  countries  are  not  disposed  to  permit  Germany  to 
make  any  considerable  payments  in  the  form  of  goods. 
The  net  result  of  these  two  opposing  tendencies  is  the  in- 
sistence by  the  Allies  that  Germany  shall  pay  the  huge  totals 
demanded,  under  threat  of  further  military  occupation,  and 
the  adoption  of  means  to  prevent  the  importation  of  German 
goods,  with  which  alone  Germany  can  pay. 

It  should  be  stated  at  this  point,  however,  that  since  the 
May  "settlement"  of  this  year,  a  plan  has  been  evolved 
whereby  it  is  believed  France  will  receive  a  part  of  the 
payments  due  her  in  materials  for  reconstruction  of  the 
devastated  areas.  This  development  will  be  discussed  in 
detail  in  the  following  chapter.  Meanwhile  we  shall  con- 
sider the  situation  as  it  existed  until  May  last,  and  as  it  still, 
in  the  main,  exists.  We  say  "in  the  main"  because  the  con- 
tradiction still  pertains  to  the  payment  of  about  half  the 


WILLINGNESS  OF  ALLIES  TO  BE  PAID  205 

French  share,  and  to  all  that  of  the  other  countries,  amount- 
ing to  over  70  per  cent  of  the  total.  Moreover,  the  plan 
whereby  France  is  to  receive  one-third  in  reconstruction 
materials  is  apparently  to  operate  for  only  a  few  years — 
until  the  devastated  areas  have  been  repaired. 

In  the  present  chapter  we  shall  show  why  Germany  can- 
not pay  in  money,  and  why  there  is  no  possible  means  of 
payment  other  than  by  exporting  more  commodities  than 
are  imported.  We  shall  also  indicate  why  the  Allied  nations 
are  not  willing  to  permit  Germany  to  pay  in  the  only  way 
that  it  is  possible  for  payment  to  be  made. 

Inability  to  Pay  Money 

Germany  cannot  pay  more  than  an  infinitesimal  part  of 
the  obligations  imposed  upon  her  by  shipping  gold  to  the 
Allies.  Practically  all  of  the  German  gold  supply — as  is 
the  case  in  other  countries — is  now  concentrated  in  the 
central  bank.  Gold  in  private  hoards,  if  there  be  any  such, 
may  be  disregarded  because  of  the  practical  impossibility 
of  collecting  it.  Now  the  total  gold  supply  in  the  Reichs- 
bank  at  the  present  time  is  1,091,000,000  marks,  or  about 
$260,000,000.  Since  Germany  is  required  to  pay  2  billion 
gold  marks  annually,  exclusive  of  the  26  per  cent  tax  on 
exports,  it  will  be  seen  that  the  entire  gold  supply  of  Ger- 
many would  suffice  to  meet  the  minimum  obligations  for  a 
little  more  than  a  half  year.  And  having  paid  it  out  once 
it  is  obvious  that  Germany  could  not  use  this  gold  in  making 
any  further  payments.  Moreover,  since  Germany  produces 
no  gold,  any  addition  to  her  gold  supply  can  be  secured  only 
by  exporting  commodities. 

The  utter  impossibility  of  paying  huge  international 
obligations  in  actual  gold  may  be  seen  from  the  fact  that 
the  total  production  of  gold  in  the  world  is  annually  now 
only  about  $300,000,000  and  that  the  total  world  produc- 


206  THE  REPARATIONS  DILEMMA 

tion  of  gold  since  the  discovery  of  America  has  been  less 
than  $18,000,000,000,  about  half  of  which  has  been  lost 
or  destroyed.  Of  the  amount  in  existence,  the  United  States 
has  about  $3,000,000,000  in  the  form  of  gold  coin  and 
bullion,  Great  Britain  about  $650,000,000,  and  France  about 
$1,000,000,000.  In  the  light  of  these  simple  statements  of 
fact,  it  is  clear  that  international  debts  can  be  paid  only  to 
a  very  small  degree  by  shipments  of  gold.  Still  less  can  be 
paid  in  silver — Germany,  for  example,  having  only  a  few 
million  dollars  of  the  white  metal. 

Not  only  is  it  impossible  for  Germany  to  pay  more  than 
1,091,000,000  marks  of  the  debt  in  gold,  but  if  the  Allies 
are  interested  in  further  payments  Germany  should  not  be 
permitted  to  part  with  her  existing  gold  supply.  For  this 
meager  German  supply  of  gold  is  the  only  support  to  the 
more  than  80  billions  of  paper  currency  now  outstanding. 
If  the  Allies  wish  to  precipitate  a  financial  collapse  in  Ger- 
many, they  have  only  to  demand  that  this  gold  be  used  in 
payment. 

One  may  ask,  in  the  light  of  these  facts,  why  the  official 
statements  always  say  that  Germany  must  pay  so  many 
gold  marks  per  annum?  The  explanation  of  the  term  gold 
marks  is  not  that  the  Reparations  Commission  expects  that 
the  debts  are  to  be  paid  in  actual  gold ;  it  merely  insists  that 
the  value  of  the  debts  shall  be  reckoned  in  terms  of  gold 
rather  than  in  terms  of  depreciated  paper  money. 

If  Germany  cannot  pay  in  gold,  can  she  not  use  other 
forms  of  money  for  the  purpose?  The  answer  is  that  she 
can  pay  nothing  outside  of  her  own  borders  with  paper 
money.  No  nation  will  accept  in  the  settlement  of  inter- 
national obligations  of  any  kind  the  fiduciary  paper  cur- 
rency of  another  nation.  Gold  is  the  only  currency  that  is 
acceptable  in  settling  international  debts — and  even  this  only 
by  weight  and  fineness.    Gold  is  the  international  money. 


WILLINGNESS  OP  ALLIES  TO  BE  PAID  207 

German  Labor  Not  Acceptable 

If  German  reparations  cannot,  therefore,  be  paid  in  gold, 
in  what  are  they  to  be  paid?  There  are  several  possibilities 
to  be  considered.  In  the  first  place,  it  has  been  suggested 
that  German  labor  might  be  sent  into  France  for  the  pur- 
pose of  making  a  physical  reconstruction  of  the  devastated 
areas.  This  means  w^as  in  fact  proposed  by  the  Germans 
themselves  at  the  Peace  Conference.  But  the  French  repre- 
sentatives at  that  time  refused  to  accept  the  suggestion,  on 
the  ground  that  French  labor  was  opposed  to  the  competi- 
tion in  their  own  country  of  imported  German  labor. 
Moreover,  have  they  not  seen  enough  of  German  invaders 
for  one  lifetime? 

The  offer  has  nevertheless  been  recently  repeated  by 
the  Germans;  and  the  final  terms  of  the  settlement  do  in 
fact  make  it  possible  for  the  Allies  to  call  upon  German 
labor  as  needed.  But  thus  far  no  call  has  been  made;  nor 
is  there  likely  to  be  any  demand  for  German  labor.  The 
only  practical  suggestion  that  has  been  made  is  that  Ger- 
man labor  be  utilized  in  constructing  French  highways  and 
in  planting  trees  along  those  highways.  Such  work,  it  is 
very  true,  would  offer  no  competition  to  French  labor; 
but  neither  would  it  relieve  the  burden  under  which  the 
French  Treasury  is  laboring. 

France  boasts  that  she  has  already  effected  the  recon- 
struction of  a  considerable  part — approximately  50  per  cent 
— of  the  devastated  regions ;  and  that  she  is  willing  to  under- 
take the  reconstruction  of  the  rest.  What  France  wants  is 
not  German  labor,  but  payment  for  the  work  which  French 
labor  has  already  performed  and  is  willing  to  perform  in 
completing  the  task  of  reconstruction.  Neither  France  nor 
Belgium  is  willing  to  permit  more  than  an  infinitesimal  frac- 
tion of  the  total  reparation  payments  to  be  made  by  German 
labor. 


208  THE  REPARATIONS  DILEMMA 

Payment  in  Goods 

A  second  means  theoretically  open  to  Germany  of  reim- 
bursing France  is  by  the  shipment  of  commodities  into 
France.  These  might  be  composed  of  materials  necessary 
for  reconstruction  purposes,  machinery  and  equipment  for 
factories,  etc.,  and  goods  in  form  for  consumption.  But 
here  again  we  find  that  France  has  not  been  willing  to  re- 
ceive such  commodities,  save  in  limited  quantities. 

We  have  already  seen  that  some  commodities  have  been 
received  by  the  Allies,  such  as  ships,  coal,  rolling  stock, 
livestock,  etc.  But  we  find  that  the  amounts  of  these  com- 
modities that  are  acceptable  have  been  strictly  limited.^  It 
has  been  many  times  suggested  that  Germany  should 
furnish  the  materials  necessary  for  the  reconstruction  of 
northern  France.  Having  destroyed  this  region,  what  could 
be  more  just  than  that  Germany  should  provide  the  materials 
for  its  restoration?  Surely  France  would  welcome  this 
means  of  payment,  whatever  its  attitude  towards  the 
utilization  of  German  labor  for  reconstruction  purposes. 

In  this  connection  it  is  important  to  recall  that  the  Peace 
Treaty  provided  that  Germany  should  devote  her  economic 
resources  directly  to  the  physical  restoration  of  the  in- 
vaded areas.  Concretely,  Germany  was  to  furnish  animals, 
machinery,  equipment,  tools,  and  like  articles  of  a  commer- 
cial character;  also  reconstruction  materials,  stones,  brick, 
tile,  wood,  window  glass,  steel,  lime,  cement,  furniture, 
and  heating  apparatus.^  The  commodities  included  in  the  list 
represent  the  German  products  which  at  the  time  of  the 
Peace  Conference  the  Allies  had  selected  as  those  they  par- 
ticularly desired  from  Germany. 


"These  provisions  are  found  in  the  annex  of  the  reparation  clauses. 

*  For  a  discussion  of  the  effects  upon  the  Allies  of  the  receipt  of 
German  coal  and  ships,  and  of  the  final  refusal  to  receive  any  more 
ships,  see  pages  227-229. 


WILLINGNESS  OF  ALLIES  TO  BE  PAID  209 

Within  three  months  of  the  signing  of  the  Treaty  the 
AlHed  governments  handed  to  the  Reparations  Commission 
a  list  of  materials  which  they  wished  to  have  delivered  by 
Germany.  The  list  was  composed  of  wood,  textiles,  paper, 
construction  material,  industrial  tools,  metal  construction, 
etc.,  to  a  total  value  of  over  13  billion  francs.  This  request 
was  submitted  to  Germany.  As  usual  Germany  delayed 
answering  for  a  considerable  period  of  time,  and,  after  long 
dispute  with  the  Reparations  Commission,  sent  in  a  list  of 
commodities  which  in  considerable  measure  conformed  to 
the  Allied  demands.  The  French  government,  however, 
then  decided  not  to  accept  the  German  materials  offered, 
partly  on  account  of  the  high  prices  which  were  to  be 
charged  against  the  reparation  account  for  these  commodi- 
ties, and  partly  because  of  the  effects  of  the  competition  of 
German  goods  on  French  industry.  The  report  of  the  Com- 
mission on  the  French  budget  for  1921,  published  March 
I,  1 92 1,  says  of  these  negotiations  that  while  the  Germans 
showed  bad  faith  in  fulfilling  their  agreements,  the  French 
Commission  showed  a  lack  of  energy  in  enforcing  them. 
"In  some  cases  they  were  restrained  by  the  fear  that  the 
German  products  would  compete  with  our  own  goods." 

The  truth  is  that  while  the  French  have  all  along  ap- 
peared to  be  willing  to  admit  reparation  payments  in  com- 
modities, still  when  the  point  is  reached  where  an  actual 
agreement  for  delivery  must  be  made,  French  industries 
themselves  bring  pressure  to  bear  against  accepting  the 
German  commodities. 

Fear  of  Effects  of  Reparation  Payments 

The  proposed  use  of  German  materials  for  the  construc- 
tion of  houses  in  the  devastated  areas  is  most  illuminating. 
Since  wood  was  the  only  building  material  that  France  could 
not  readily  furnish  for  herself,  it  was  suggested  by  the 


2IO  THE  REPARATIONS  DILEMMA 

Germans  that  they  furnish  25,000  wooden  houses.  But  the 
Builders'  and  PubHc  Works  Contractors'  Association  of  the 
"Nord"  (the  department  that  suffered  most  from  the  war) 
immediately  drew  up  a  long  indictment  of  the  proposal.  A 
vehement  protest  was  made  against  "the  entry  into  France 
of  materials  worked  up  by  German  labor  to  the  detriment 
of  French  workmen  and  contractors."  Objections  were 
also  raised  to  the  principle  of  substituting  wooden  dwellings 
for  the  customary  stone  and  brick.  At  the  most  Germany 
should  not  be  allowed  to  furnish  houses  costing  in  excess 
of  8,000  francs.  * 

There  is  also  a  sentimental  reason  against  allowing  Ger- 
many to  construct  French  houses.  The  French  peasant  and 
workman  returns  to  the  site  of  the  old  home  and  desires 
himself  to  oversee  its  reconstruction  with  a  view  to  making 
it  a  replica  of  former  days.  All  that  this  home-rebuilder 
wants  is  pay  for  his  losses — pay  in  the  form  of  cash. 

It  has  been  the  same  story  with  machinery.  Under  the 
terms  of  the  Peace  Treaty,  France  was  given  the  right  to 
call  upon  Germany  for  any  machinery  required.  John  F, 
Dulles,  Counsel  to  the  Peace  Commission,  is  authority  for 
the  statement  that  France  has  never  called  for  a  single  piece 
of  German  industrial  machinery.  The  explanation  is  that 
French  manufacturers  wish  to  supply  this  machinery. 
Moreover,  if  Germany  were  allowed  to  supply  the  machinery 
necessary  for  the  rehabilitation  of  French  factories,  it  is 
feared  that  the  Germans  would  gain  a  permanent  control 
of  the  market,  because  of  the  necessary  standardization  of 
machine  parts. 

If  other  evidence  is  needed  to  show  that  France  is 
unwilling  to  receive  German  goods  in  quantity,  it  is  to  be 
found  in  recent  increases  in  French  tariff  duties,  aimed 


*This  is  taken  from  the  Economist  (London),  June  18,  1921. 


WILLINGNESS  OF  ALLIES  TO  BE  PAID  211 

especially  at  imports  from  Germany.  A  statement  of 
Premier  Briand  before  the  French  Chamber  and  Senate  on 
February  3,  1921,  quoted  on  page  250,  further  confirms 
the  conclusion  that  France  is  fearful  of  the  effects  of  repara- 
tions payment  on  her  own  industries. 

The  Royal  Game  of  "Passing  the  Buck" 

We  have  thus  far  seen  merely  that  France  ^  has  been  un- 
willing to  be  made  the  "goat"  in  this  matter  of  reparations, 
by  having  her  own  industries  subjected  to  German  competi- 
tion. Are  there  not  roundabout  means,  however,  whereby 
France  can  be  paid  without  the  threat  of  injury  to  her  own 
industrial  organization  ?  Cannot  Germany  export  the  goods 
to  other  countries,  draw  bills  of  exchange  against  them,  and 
turn  these  over  to  France  in  settlement  of  reparation  obliga- 
tions? This  suggestion,  as  we  shall  see,  has  given  rise  in 
the  field  of  international  economics  to  the  well-known  game 
of  "passing  the  buck." 

One  possibility  is  for  Germany  to  export  her  goods  to 
Great  Britain  and  turn  the  resulting  bills  of  exchange  over 
to  France.  But  Britain  is  alarmed  lest  this  result  in  the 
destruction  of  her  own  industries;  and  she  has  constructed 
an  anti-dumping  tariff  bill  designed  to  keep  German  goods 
out.  When  it  is  considered  that  Germany's  principal  arti- 
cles of  export — coal,  iron  and  steel,  machinery  products, 
and  textiles — are  also  England's  principal  products,  this 
concern  is  not  difficult  to  understand. 

Incidentally,  it  may  be  noted  that  even  if  France  were 
willing  to  receive  German  goods  directly.  Great  Britain 
would  find  it  to  her  disadvantage,  since  her  continental 
markets  would  be  restricted  to  that  extent.^  Similarly,  in 
the  course  of  time  France  would  find  German  sales  in  other 


The  analysis  applies  equally  to  Belgium. 
See  discussion  on  pages  227-229. 


212  THE  REPARATIONS  DILEMMA 

countries    disadvantageous    because    of    the    effects    upon 
French  exports. 

If  England  is  unwilHng  to  receive  German  goods,  can 
we  not  nevertheless  expect  the  United  States  to  hold  the 
bag?  Is  the  United  States  willing  to  receive  German  iron 
and  steel  products,  chemicals  and  dyestuffs,  coal,  machinery, 
and  textiles,  in  order  to  permit  Germany  to  draw  bills  of  ex- 
change which  can  be  used  in  settling  reparations?  The 
best  evidence  lies  in  the  existing  Emergency  Tariff  Act  and 
the  permanent  high  tariff  bill  now  before  Congress,  aimed 
directly  against  the  threatened  invasion  of  the  American 
markets  by  European  goods.  Clearly  the  United  States — 
at  least  official  United  States — is  not  willing  to  be  the  "goat." 

European  Debts  to  the  United  States 

At  this  juncture  the  question  of  European  debts  to  the 
United  States  forces  its  way  into  the  problem.  Is  the 
United  States  any  more  willing  to  have  Europe  pay  her  war 
indebtedness  than  she  is  to  receive  the  goods  with  which 
Germany  is  to  pay  reparations?  The  perfectly  plain  answer 
again  lies  in  the  recent  tariff  legislation.  Goods  alone  can 
be  used  in  paying  these  debts,  just  as  shipment  of  goods 
abroad  during  the  war  was  the  only  means  of  creating  them. 
Merely  to  pay  the  interest  on  these  debts  will  necessitate  our 
having  an  excess  of  imports  over  exports  of  about 
$700,000,000  annually.  The  United  States,  as  the  world's 
greatest  creditor  nation,  has  troubles  enough  of  her  own, 
without  bearing  the  brunt  of  the  burden  of  receiving  repara- 
tions. 

But  at  this  point  those  who  cannot  admit  the  cruel  sug- 
gestion that  the  payment  of  international  debts,  however 
rapid  and  however  great  in  volume,  could  possibly  be  unde- 
sirable from  the  point  of  view  of  the  recipient,  shift  their 
thoughts  hopefully  to  other  markets.     "International  debts 


WILLINGNESS  OF  ALLIES  TO  BE  PAID  213 

can  be  settled  by  roundabout  processes."  It  is  often  argued 
that  just  as  England  in  the  days  before  the  war  conducted 
her  vast  international  commerce  in  roundabout  ways,  and 
thus  found  no  embarrassment  in  being  a  creditor  nation, 
the  United  States  can  now  avoid  being  paid  directly. "^  Let 
Europe  ship  the  goods  to  South  America  and  send  us  bills 
of  exchange  in  payment.  With  these  bills  we  could  then 
buy  coffee  and  rubber  in  South  America  free  of  cost  to  us. 
There  are  just  two  objections  to  this  argument.  In  the 
first  place,  the  volume  of  goods  which  South  America  can 
purchase  from  Europe  is  negligible  as  compared  with  the 
volume  of  reparation  obligations  and  Allied  debts.  In  the 
second  place,  in  view  of  the  decline  of  her  export  markets 
in  Europe,  the  United  States  is  turning  with  renewed  de- 
termination to  the  capture  of  South  American  markets. 
The  most  promising  outlet  for  our  excess  manufacturing 
capacity  is  there.  We  may  not,  indeed,  be  able  to  secure 
large  southern  markets  in  the  face  of  British,  French,  and 
German  competition;  but  this  is  another  matter.  Qur  de- 
sires and  needs  are  clear  enough.  It  may  also  be  observed 
that  Great  Britain  and  France  are  no  more  willing  to  see 
Germany  capture  the  South  American  markets  than  is  the 
United  States.  And  incidentally,  France  and  England  would 
not  be  altogether  pleased  to  see  German  goods  underselling 
their  own  in  North  American  markets. 

Supreme  Inconsistency 

If  South  America  is  out  of  the  question,  then  what  of 
Poland,  Russia,  and  the  Near  East?  Those  huge,  unde- 
veloped regions,  it  is  argued,  will  require  stupendous  quan- 
tities of  materials  during  the  next  forty  years.  Is  not  here 
Germany's  opportunity  to  provide  the  means,  through  ex- 


^  For  a  discussion  of  England's  position  as  a  creditor  nation,  see 
page  312. 


214  THE  REPARATIONS  DILEMMA 

ports,  of  paying  the  Allied  debts  to  the  West?  At  the  time 
of  the  Peace  Conference  this  issue  was  raised  with  a  high 
French  official  in  France  by  a  well-known  American 
economist.  The  French  reply  was  that  France  was  not 
willing  to  allow  Germany  to  gain  a  foothold  in  eastern 
European  markets;  French  exporters  were  casting  covetous 
eyes  in  that  direction  themselves,  and  German  competition 
must  be  prevented,^  The  French  may  not  be  able  to  keep 
Germany  out  of  these  markets;  but  that  again  is  another 
matter. 

As  regards  Polish  trade  with  Germany,  it  is  not  without 
significance  that  France  has  recently  concluded  a  secret 
treaty  with  Poland,  which  gives  French  traders  certain  ex- 
clusive privileges.  Incidentally,  once  more,  it  may  be  added 
that  Great  Britain  and  the  United  States  are  no  more  will- 
ing to  see  Germany  capture  the  eastern  European  markets 
than  is  France.  "When  Russia  comes  back"  these  great 
manufacturing  nations  count  upon  furnishing  the  materials 
necessary  for  the  industrial  rehabilitation  of  that  unhappy 
land. 

When  this  stage  of  the  discussion  is  reached,  he  who 
persists  in  the  belief  that  the  Allies  really  want  reparations 
paid  in  full  makes  his  final  stand  with  China,  When  that 
slumbering  giant  of  the  East  awakens,  cannot  German 
reparations  be  paid  through  shipments  of  goods  there? 
Think  of  the  illimitable  demands  for  oriental  products  when 
once  the  Celestial  Empire  enters  the  fold  of  industrial  civi- 
lization! In  view  of  recent  events  in  China,  however,  one 
need  not  be  very  sanguine  with  reference  to  Chinese  pur- 
chasing power  in  the  near  future.  And  as  for  the  longer 
run,  the  story  of  the  international  banking  consortium  for 
the  extension  of  credit  for  Chinese  development  is  indica- 


'  See  an  article  by  Professor  F.  W.  Taussig,  in  the  Atlantic  Monthly, 
March,  1920,  entitled  "Germany's  Reparation  Payments." 


WILLINGNESS  OF  ALLIES  TO  BE  PAID  215 

tive.  Five  nations  were  originally  represented  in  this  con- 
sortium :  Germany,  Japan,  France,  England,  and  the  United 
States.  Since  the  war  Germany  has  been  thoughtfully  ex- 
cluded. 

The  simple  truth  is  that  the  insistence  of  Allied  nations 
that  Germany  must  pay  to  the  limit  of  her  capacity  is  the 
supreme  inconsistency  of  the  ages.  At  the  very  time  when 
the  governments  of  all  the  Allied  nations  are  demanding  that 
Germany  pay  in  full,  under  threat  of  military  penalties,  one 
can  scarcely  pick  up  a  trade  or  financial  journal  without  read- 
ing accounts  of  the  menace  of  reviving  German  competition 
in  all  the  markets  of  the  world.  The  great  fear  stalking 
throughout  the  commercial  world  today  is  that  Germany  may 
come  back  as  a  powerful  competitor  in  the  international 
markets.  In  view  of  our  analysis  in  previous  discussions  of 
the  German  banking  and  monetary  situation  and  of  German 
capacity  to  pay,  it  is  clear  that  this  fear  is  very  greatly 
exaggerated.  But  it  none  the  less  evidences  the  determina- 
tion of  the  Allied  nations,  the  United  States  included,  not  to 
permit  Germany  to  pay  if  they  can  help  it. 

Other  Suggested  Means  of  Payment 

We  would  deem  it  unnecessary  to  pursue  the  reparations 
issue  further,  had  experience  not  convinced  us  that  men 
simply  will  not  give  up  hope  that  some  way  out  of  the 
dilemma  may  be  found.  Germany  simply  must  not  be  let 
off  with  a  whole  skin !  It  cannot  be  true  that  France  must 
in  the  main  herself  bear  the  burden  of  her  war  losses,  and 
the  cost  of  her  own  reconstruction!  The  suggestion  out- 
rages every  principle  of  justice !  It  will  serve  to  clarify  the 
remainder  of  the  argument  if  the  questions  that  have  been 
raised  in  informal  discussion  with  many  persons  both  in 
the  United  States  and  abroad,  be  here  definitely  stated  and 
definitely  answered. 


2l6  THE  REPARATIONS  DILEMMA 

1.  Cannot  Germany  pay  by  turning  over  to  France  the 
securities  of  German  corporations f  ^  This  proposal  was, 
in  fact,  once  made  by  Germany.  It  was,  however,  refused 
by  France,  on  the  ground  that  it  would  too  vitally  interest 
the  French  people  in  German  industrial  prosperity,  to  the 
possible  future  political  and  economic  disadvantage  of 
France.  But  in  any  event,  transferring  to  France  stocks 
and  bonds  of  German  corporations  would  not  solve  the 
dilemma.  It  would  merely  shift  the  responsibility  for  pay- 
ing from  the  German  government  to  German  corporations. 
How  would  the  interest  and  dividends  on  German  securities 
be  paid  to  France?  German  corporations  can  pay  interest 
and  dividends  only  in  paper  marks ;  they  have  no  gold  with 
which  to  pay.  And  German  paper  marks  are  practically 
worthless  in  France.  In  order  to  obtain  acceptable  means 
of  payment,  the  German  corporations  would  therefore  have 
to  export  goods  against  which  bills  of  exchange  might  be 
drawn.  Once  more — if  Germany  is  to  pay — somebody  must 
be  willing  to  receive  German  goods. 

2.  Cannot  German  corporations  be  compelled  to  turn 
over  their  dividends  to  the  German  government,  and  thus 
permit  the  German  government  to  pay  France?  We  are 
here  right  back  to  where  we  started  from.  The  German 
government  is  to  pay  France  by  getting  the  means  from  the 
German  people.  But  there  is  insufficient  gold  with  which 
to  make  these  payments,  and  the  only  way  open  is  to  ship 
goods  against  which  bills  of  exchange  may  be  drawn.  Who 
will  accept  the  goods  ? 

3.  Cannot  the  Allies  be  given  the  ownership  of  future 
rather  than  of  present  German  corporations,  or,  better  still, 
of  future  Russian  industries,  built  up  as  a  result  of  German 
exports  to  Russia?    It  is  difficult  to  see  how  the  ownership 

•  Foreign  securities  need  not  be  considered,  since  the  quantity  still 
owned  by  Germany  is  negligible. 


WILLINGNESS  OF  ALLIES  TO  BE  PAID  21 7 

of  future  German,  or  Russian,  industries  will  prove  any 
more  satisfactory  than  the  ownership  of  present  German 
industries.  One  would  imagine,  moreover,  that  if  this 
ownership  were  to  bring  tangible  benefits  to  the  citizens  of 
the  Allied  nations,  it  would  be  through  the  receipt  of  inter- 
est on  their  investments  in  such  industries.  Once  more, 
how  is  this  interest  to  be  paid,  if  not  in  goods?  And  who 
is  to  receive  the  goods  ? 

4.  Cannot  the  Allies  seize  German  cities  and  collect  ctis- 
toms  and  other  revenues  in  satisfaction  of  indemnity  claims f 
This  is  not  an  academic  question,  merely.  It  has  already 
been  an  official  policy  on  the  part  of  Allied  governments.  In 
the  ultimatum  submitted  to  Germany  in  March,  1921,  there 
were  laid  down  in  the  most  solemn  language  which  states- 
craft  could  devise  the  means  of  collection  that  would  be 
employed  in  case  the  Germans  refused  longer  to  "disgorge." 

"Unless  it  transpires  by  Monday  next  [reads  the  Allied 
ultimatum]  that  Germany  has  decided  to  execute  the  agree- 
ment of  Paris  of  the  twenty-ninth  of  January,  192 1,  or  to 
submit  proposals  which  will  permit  her  to  fulfill  by  other 
means  equally  satisfactory  the  obligations  incumbent  upon 
her  under  the  terms  of  the  Treaty  of  Versailles,  with  reser- 
vations concerning  the  concessions  granted  at  Paris,  we  will 
take  from  the  date  named  the  measures  herein  mentioned: 

"The  Allies  are  in  accord  in  the  decision  that  the  cities 
of  Duisburg,  and  Diisseldorf  shall  be  occupied  .  ,  .  That 
all  customs  duties  collected  on  the  exterior  frontiers  of  the 
territories  occupied  shall  be  paid  into  the  Reparations  Com- 
mission. That  a  line  of  customs  houses  shall  be  provision- 
ally established  on  the  Rhine  and  at  the  limit  of  the  bridge- 
heads occupied  by  the  Allies.  That  the  duties  to  be  collected 
on  this  customs  line — whether  export  or  import — shall  be 
fixed  by  the  High  Inter-Allied  Commission  of  the  Rhenish 
territories,  in  agreement  with  the  Allied  governments." 


2l8  THE  REPARATIONS  DILEMMA 

When  the  Germans  failed  to  come  to  terms,  moreover, 
AUied  armies  marched  resolutely  into  Germany,  seized  the 
Rhine  cities  of  Ruhrort,  Duisburg,  and  Diisseldorf,  and 
made  ready  to  collect  as  any  creditor  armed  with  legal  sanc- 
tions might  do.  With  supreme,  though  apparently  uncon- 
scious irony,  M.  Tardieu  asks  in  his  book,  "But  has  anyone 
observed  that  we  have  been  able  to  collect  a  single  franc?" 
The  reason  is  that  German  customs  duties  and  other  taxes 
are,  of  necessity,  paid  in  paper  marks.  And  continental 
paper  money — east  of  the  Rhine — is  no  longer  "worth  a 
continental."  No  guaranty  would  be  of  any  value  except  a 
claim  to  German  goods;  and  this  is  regarded  as  valueless, 
because  nobody  wants  the  goods. 

5.  Cannot  France  receive  payment  through  the  sale  of 
reparation  bonds  for  cash?  There  is  one  possibility  by 
means  of  which  particular  Allied  nations  might  conceivably 
receive  benefits  from  reparation  payments  at  the  expense  of 
other  nations.  France  has  in  fact  been  counting  heavily 
upon  this  device.  When  the  German  reparation  bonds  are 
received,  France  hopes  to  sell  a  considerable  part  of  her 
allotment  thereof  in  the  world's  investment  markets — which 
means,  under  present  conditions,  principally  in  the  United 
States.  The  condition  of  the  French  budget,  as  we  have 
seen,  is  desperate.  France  hopes  through  the  sale  of  repara- 
tion bonds  to  improve  materially  her  financial  status. 

In  considering  this  phase  of  the  problem  it  should  be 
understood  at  the  outset  that  France  does  not  expect  to  turn 
over  to  the  United  States  reparation  bonds  in  liquidation 
of  her  existing  debts  to  us.  Since  France  is  not  paying 
interest  on  her  debts  to  other  governments,  no  help  to  the 
French  budget  would  come  from  a  substitution  of  repara- 
tion bonds  for  French  government  obligations.  Interest  is 
being  paid,  however,  by  the  French  people  on  private  obliga- 
tions in  the  United  States,  which  amount  to  approximately 


WILLINGNESS  OF  ALLIES  TO  BE  PAID  219 

$1,000,000,000.  If  France  could  sell  reparation  bonds  in 
the  United  States  sufficient  in  amount  to  offset  these  inter- 
est charges,  that  degree  of  help  would  obviously  be  given 
to  the  French  budget.  It  will  be  observed,  however,  that  at 
best  this  is  negligible — amounting  to  only  250  million  francs 
as  against  an  estimated  deficit  of  35  billion  francs.  ^^ 

Moreover,  what  France  is  much  more  likely  to  insist 
upon  is  the  opportunity  to  sell  reparation  bonds  as  a  means 
of  buying  necessary  goods  in  the  United  States.  In  other 
terms,  this  means  giving  France  additional  credit.  To  the 
extent  that  France  could  dispose  of  these  securities  in  the 
United  States  markets  it  would  clearly  strengthen  her  finan- 
cial position. 

But  what  is  the  chance  that  investors  in  the  United  States 
will  be  willing  to  buy  German  reparation  bonds?  There 
is  little  probability  that  we  should  be  willing  to  buy  them 
at  all  without  French  indorsement,  which  means  that  we 
would  really  place  our  faith  in  France  rather  than  in  Ger- 
many. In  effect  it  would  therefore  mean  that  France's  own 
obligations  would  thus  be  increased,  and  her  financial  posi- 
tion would  therefore  be  improved  but  little  if  at  all. 

It  is  the  general  belief  in  American  financial  circles, 
moreover,  that  reparation  bonds  could  not  possibly  be 
marketed  in  the  United  States  at  a  better  price  than  50  per 
cent  of  par.  It  is  the  further  belief  that  no  great  quantities 
could  be  marketed  at  any  price  at  the  present  time  or  in  the 
near  future.  This  is  partly  because  of  the  enormous  supply 
of  investments  of  better  grade  that  are  available  for  our 
markets,  and  partly  because  of  the  enormous  risks  attaching 
to  the  reparation  bonds.  Other  foreign  governments  are 
continually  seeking  to  place  loans  in  the  United  States, 
and  in  addition  we  must  absorb  large  issues  of  American 


See  analysis  of  the  French  budget,  pages  49-54. 


220  THE  REPARATIONS  DILEMMA 

governmental,  municipal,  railroad,  public  utility,  financial, 
commercial,  and  industrial  securities.  Our  investment 
power  is  limited;  and  investors  may  be  expected  to  choose 
with  a  view  to  securing  a  maximum  of  yield  with  a  mini- 
mum of  risk.^* 

Before  investing  in  reparation  bonds  the  American 
people  should,  moreover,  clearly  appreciate  that — wisely  or 
unwisely — our  government  policy  is  designed  to  make  it 
impossible  for  Germany  to  pay  interest  on  reparation  bonds. 
For  in  this  matter  of  the  sale  of  reparation  bonds  by  France 
to  the  United  States  we  tie  right  back  to  the  preceding 
analysis.  The  nations  which  buy  the  reparation  bonds  will 
have  to  get  their  pay  by  means  of  German  exports.  If  we 
buy  German  reparation  bonds  and  expect  to  receive  interest 
thereon,  we  must  agree  to  receive  the  German  goods  which 
France  is  unwilling  to  accept.  The  emergency  tariff  should 
cause  every  American  investor  to  shun  reparation  bonds 
as  utterly  valueless  securities. 

The  conclusion  with  reference  to  the  sale  of  reparation 
bonds  in  the  American  market  is  therefore  twofold :  first,  it 
could  not  at  best  be  relied  upon  to  bring  much  financial  help 
to  France;  second,  American  investors  should  refuse  to 
purchase  such  bonds  so  long  as  the  American  government 
refuses  to  allow  Germany  to  send  exports  freely  to  this 
country  as  a  means  of  payment. 

Whatever  the  theoretical  possibility  that  some  particular 
nation  might  obtain  fiscal  relief  through  the  sale  of  repara- 
tion bonds,  as  a  practical  matter  the  suggestion  that  German 
reparation  bonds  can  be  effectively  utilized  by  the  nations 
receiving  them  is  of  no  value.  No  nation  and  no  group  of 
investors  is  willing  to  invest  any  appreciable  sum  in  repara- 
tion bonds.    And  of  far  deeper  significance  is  the  inescapa- 


For  further  discussion  on  this  subject,  see  Chapter  XX. 


WILLINGNESS  OF  ALLIES  TO  BE  PAID  221 

ble  fact  that  no  Allied  nation  is  willing  to  permit  Germany 
to  pay  interest  on  reparation  bonds,  in  the  only  way  possible, 
i.e.,  by  expanding  exports. 

In  conclusion,  the  nature  of  the  reparations  dilemma 
cannot  be  better  epitomized  than  in  the  words  of  a  well- 
known  Anglo-Saxon  business  man :  "We  believe  Germany 
should  be  forced  to  pay ;  we  doubt  whether  she  can  pay ;  but 
if  we  find  that  she  can,  by  jingo  we  won't  let  her." 


CHAPTER   XV 

THE  ECONOMICS  OF  THE  REPARATIONS 
PROBLEM 

Reparations  and  Free  Trade 

It  is  clear  enough,  then,  that  the  Allies  are  unwilling  to 
receive  any  great  volume  of  German  reparations.  The  re- 
fusal to  call  for  goods  under  the  rights  given  in  the  Treaty, 
the  imposition  of  heavy  tariffs  against  German  goods, 
together  with  the  prevalent  fear  throughout  the  commercial 
world  of  a  revival  of  German  competition,  afford  conclu- 
sive evidence  on  this  point.  While  the  facts  are  thus 
undoubtedly  as  stated,  is  not  this  refusal  of  the  Allies  merely 
a  bit  of  stupid  protectionism?  If  only  the  statesmen  knew 
it,  would  it  not  be  to  the  advantage  of  Allied  nations  to 
receive  all  the  goods  that  Germany  could  possibly  send  them  ? 

The  theory  of  free  trade  would  at  first  blush  appear  to 
argue  that  the  receipt  of  reparations  and  of  Allied  debts 
would  prove  a  direct  benefit  to  the  nations  concerned.  If 
France,  for  example,  should  receive  $10,000,000,000  of 
reparations,  would  not  her  wealth  be  increased  by  $10,000,- 
000,000 — "other  things  remaining  equal";  and  if  the  United 
States  should  receive  the  payment  of  European  war  debts, 
would  she  not  be  the  wealthier  by  the  amount  of  the  pay- 
ments— "other  things  being  equal"  ?  It  is  usually  recognized 
in  this  line  of  argument  that  there  would  be  some  difficul- 
ties during  the  transition  period — that  the  nations  receiving 
the  indemnities  would  have  to  shift  their  production  to  other 
lines  of  activity.  But  it  is  usually  assumed  that  this  shifting 
could  be  readily  accomplished. 

Although  we  do  believe  in  the  principles  of  free  trade, 

232 


ECONOMICS  OF  REPARATIONS  PROBLEM  223 

we  cannot  accept  without  serious  qualifications  this  Hne  of 
analysis  as  applied  to  the  payment  of  huge  reparations  and 
international  debts.  The  theory  of  free  trade,  as  ordinarily 
expounded,  is  predicated  upon  assumptions  of  conditions 
that  are  fundamentally  different  from  those  which  exist 
today.  It  presupposes  the  gradual  evolution  of  trade  and 
financial  relations  between  nations ;  it  presupposes  relatively 
stable  or  "normal"  conditions;  and  in  its  simplest  form  it 
usually  presupposes  that  all  nations  are  pursuing  similar 
trade  policies.  The  theory,  however,  recognizes  difficulties 
in  effecting  a  transition  from  a  protectionist  to  a  free  trade 
regime;  indeed,  free  traders  usually  admit  that  the  passing 
over  from  protection  to  free  trade  should  be  compassed  only 
gradually,  in  order  that  the  attending  disturbances  to  in- 
dustry may  be  reduced  to  a  minimum.  Still,  it  is  often  urged 
that  the  difficulties  of  transition  would  ordinarily  not  be 
very  great — that  things  would  soon  "automatically"  adjust 
themselves  to  changed  conditions. 

Violent  Trade  Readjustment 

This  is  no  doubt- true,  ordinarily.  But  the  present  situa- 
tion is  not  an  ordinary  one.  The  huge  international  obli- 
gations that  have  been  incurred  are  not  the  result  of  gradual 
trade  and  financial  evolution  in  the  world  at  large,  with  in- 
dustry and  finance  closely  adjusted  to  each  step  in  the  process 
of  growth  and  change.  The  Allied  indebtedness  is  the  result 
of  a  trade  and  financial  readjustment  and  upheaval  wholly 
unprecedented  in  history ;  the  German  indemnity  reparation 
is  the  result  of  an  ultimatum  imposed  by  victor  upon  van- 
quished. The  payment  in  full  of  Allied  debts  and  of 
reparations — if  it  were  possible — would  accordingly  force  a 
readjustment  of  trade  and  industry  in  the  nations  receiving 
the  goods  of  unprecedented  severity. 

It  may  be  objected  that  the  United  States  might  receive 


224  THE  REPARATIONS  DILEMMA 

the  payment  of  the  principal  of  the  AUied  debts  of  some  14 
biUion  dollars  in  very  gradual  instalments,  and  thus  minimize 
the  shock  to  industry.  But  the  same  objection  cannot  be 
made  with  reference  to  reparations.  It  is  stipulated  in  the 
bond  that  Germany  must  begin  payments  at  once  and  at  the 
annual  rate  of  $500,000,000  plus  26  per  cent  of  the  value  of 
the  total  exports.  It  is  important  to  bear  in  mind,  moreover, 
that  the  interest  alone  on  the  Allied  debts  to  the  United  States 
amounts  to  about  $700,000,000  annually,  and  that  if  Europe 
were  to  cease  further  borrowing  and  merely  commence  the 
payment  of  interest,  the  United  States  would  find  itself  with 
an  adverse  trade  balance  of  about  $700,000,000  annually. 

Modern  industry  requires  the  investment  of  stupendous 
quantities  of  fixed  capital.  This  is  perhaps  the  most  striking 
feature  of  the  economic  organization  of  the  world  today. 
The  large-scale  enterprises  of  the  present  are,  moreover,  com- 
monly international  in  scope.  For  these  reasons  extensive 
readjustments  of  trade  and  industry  produce  consequences 
much  more  disastrous  than  was  the  case  in  former  days. 
There  is  nothing  "automatic"  about  a  far-reaching  reorgani- 
zation of  the  modern  industrial  system. 

The  problem  of  international  debts  is  put  by  John  F. 
Dulles  in  the  following  graphic  language : 

"These  vast  debts  could  never  have  come  into  being  under 
normal  conditions.  No  more  can  they  be  fully  paid  under 
normal  conditions.  They  can  only  be  fully  paid  by  economic 
efforts  as  violent  and  as  destructive  as  those  which  were  re- 
quired to  give  them  birth.  A  hurricane  has  swept  over  the 
world.  We  survey  with  grief  the  wreckage  that  lies  in  its 
train;  but  let  us  not  commit  the  capital  error  of  believing 
that  all  will  be  righted  by  another  hurricane  if  only  it  blows 
from  the  opposite  direction." 

No  one  who  realizes  the  enormous  impetus  that  was 
given  to  American  industry  during  the  war  as  a  result  of 


ECONOMICS  OF  REPARATIONS  PROBLEM  225 

the  huge  foreign  requirements  for  American  goods  that 
were  superimposed  upon  the  normal  domestic  and  foreign 
demands,  and  no  one  who  appreciates  the  depressing  effects 
of  the  present  changed  conditions  will  deny  that  if  Germany 
could  succeed  in  making  the  reparations  payments  demanded, 
German  industry  would  be  greatly  stimulated  and  Allied 
industry  greatly  depressed. 

In  this  connection,  it  will  be  helpful  to  recall  that  war 
goods  exported  by  the  United  States  were  not  paid  for ;  like 
reparations,  they  were  gifts,  so  far  at  least  as  anyone  can  yet 
foresee.  But  none  the  less,  Americans  had  their  prosperity 
while  the  process  was  on.  Indeed,  it  would  seem  that  Ameri- 
can contributions  in  the  way  of  war  materials  and  supplies 
cost  us  comparatively  little  as  a  nation.  It  was  in  consider- 
able measure  contributed  out  of  the  excess  production  that 
was  stimulated  by  the  war  demands.  There  was  steady 
employment  at  good  wages  for  everyone.  The  industrial 
machine  worked  under  high  pressure,  and  until  the  latter 
months  of  the  war  at  least,  the  total  industrial  output  was 
very  great.  There  is  another  side  to  all  this,  it  is  true. 
Prices  were  sky-rocketed ;  bank  reserves  were  depleted ;  cer- 
tain important  industries  were  neglected ;  etc.,  etc.  But  while 
the  game  was  on,  the  nation  as  a  whole  was  extraordinarily 
prosperous. 

Reparations  and  German  Imports 

It  is  sometimes  urged  that  the  expansion  of  German  ex- 
ports that  would  be  required  if  Germany  were  to  succeed  in 
meeting  her  reparation  obligations  would  not  prove  a  detri- 
ment to  Allied  nations,  for  the  reason  that  Germany  would 
herself  buy  more  from  the  Allies.  Germany  could  not  greatly 
expand  her  exports  unless  she  first  greatly  increased  her  im- 
ports of  raw  materials,  etc.  Hence  the  Allied  nations,  it  is 
urged,  would  gain  as  a  result  of  enlarged  sales  to  Germany. 


226  THE  REPARATIONS  DILEMMA 

There  is  undoubtedly  an  element  of  truth  in  this  argu- 
ment. Germany  would,  indeed,  have  to  import  heavily;  and 
certain  industries  in  certain  countries  would  clearly  profit 
in  consequence.  But  this  by  no  means  warrants  the  conclu- 
sion that  the  Allies  would  reap  a  net  benefit  from  the  pay- 
ments ;  it  does  not  even  disprove  the  contention  that  the  net 
result  would  be  detrimental  to  the  Allies.  For  it  must  be 
remembered  that  if  reparations  are  to  be  paid,  it  must  be 
by  an  excess  of  exports  over  imports.  Germany  must  not 
buy  as  much  abroad  as  she  sells  abroad ;  she  must  import  less 
by  the  precise  amount  of  the  reparations.  Accordingly,  Al- 
lied industry  would  find  less  ample  markets  than  would  be 
the  case  were  no  reparations  made — with  Germany  free  to 
use  all  of  her  exports  as  a  means  of  buying  imports.  As 
free  traders  we  insist  that  balanced  trade  between  nations  is 
desirable,  and  that  unbalanced  trade  is  practically  certain  to 
prove  detrimental  to  the  nations  receiving  the  excess  of 
imports. 

French  Indemnity  of  187 1 

After  the  Franco-Prussian  War  Germany  imposed  an 
indemnity  of  $1,000,000,000  upon  France.  What  light  does 
the  payment  of  this  indemnity  throw  upon  the  present  issue  ? 
The  world  has  ever  since  marveled  at  the  rapidity  with  which 
France  effected  the  payments.  Students  of  the  question, 
however,  have  never  reached  agreement  as  to  the  precise 
effects  and  consequences  of  the  operations  involved.  It  was 
paid  in  part  by  a  surrender  of  French  securities  in  other 
countries.  This  portion  of  the  payment,  it  will  be  seen,  did 
not  require  an  expansion  of  French  exports.  But  the  re- 
mainder— in  the  main — was  paid  with  bills  of  exchange 
drawn  against  French  exports.  It  is  known  that  France 
enjoyed  a  period  of  prosperity  during  the  interval,  and  that 
Germany  was  in  the  throes  of  depression.    While  other  fac- 


ECONOMICS  OP  REPARATIONS  PROBLEM  227 

tors  no  doubt  affected  the  situation,  there  is  good  reason  to 
believe  that  the  payment  proved  an  industrial  boomerang  to 
Germany  and  that  France  felt  the  burden  relatively  little, 
largely  meeting  it  out  of  stimulated  business. 

But,  it  will  now  be  asked,  if  France  could  so  quickly  and 
so  easily  pay  the  indemnity  of  1871,  why  cannot  Germany 
now  pay,  as  it  is  contended  by  so  many  that  she  can  ?  The 
answer  is  that  the  Franco-Prussian  War  was  a  mere  skirmish 
as  compared  with  the  World  War.  It  lasted  but  a  half-year  ; 
only  two  nations  were  involved ;  and  it  was  in  no  sense  a  war 
of  attrition.  There  was  little  disruption  of  world  trade,  or 
of  the  foreign  exchanges,  or  of  monetary  and  banking 
systems,  or  of  the  internal  economic  organization  of  the 
nations  involved.  Both  France  and  Germany  were,  more- 
over, at  that  time  essentially  agricultural  nations.  Accord- 
ingly, the  two  situations  are  wholly  different.  For  similar 
reasons,  the  economic  recovery  of  Europe  then  was  a  very 
different  problem  from  that  of  the  present  disordered  times. 

Illustrations  of  Economic  Effects 

It  will  help  greatly  to  an  understanding  of  the  economic 
effects  of  the  payment  of  reparations  and  Allied  debts,  if 
attention  is  given  to  some  concrete  cases.  Under  the  terms 
of  the  Peace  Treaty,  in  addition  to  surrendering  the  greater 
part  of  her  mercantile  fleet,  Germany  was  required  to  build 
ships  for  the  Allies  at  a  certain  rate  per  year.  The  Allies 
were  satisfied  with  the  arrangement  so  long  as  the  post-war 
tonnage  shortage  prevailed.  When  the  shipping  depression 
developed,  however,  they  were  soon  forced  to  cry  quits,  and 
to  refuse  further  ships.  So  severe  has  been  the  depression 
in  Allied  shipping  that  the  ships  received  by  Great  Britain 
are  now  being  offered  for  sale  at  ruinous  prices,  with  Ger- 
many almost  the  only  purchaser.  There  is  still  under  con- 
struction in  German  shipyards  the  Bismarck,  the  largest 


228  THE  REPARATIONS  DILEMMA 

and  most  magnificent  ocean  liner  ever  built.  We  are  in- 
formed that  it  is  to  be  delivered  to  the  Red  Star  Line  under 
a  contract  price  with  the  government  which  it  is  already 
recognized  will  result  in  operating  deficits. 

An  even  more  interesting  case  is  that  of  coal.  The 
Germans,  with  the  ruthlessness  which  characterized  all  their 
war  operations,  wrecked  the  French  coal  fields  when  they 
evacuated  France,  hoping  that  by  so  doing  they  would 
make  it  for  years  impossible  for  the  French  and  the  Belgians 
to  compete  in  supplying  coal  for  the  general  European 
market.  In  fact,  there  is  an  official  memorandum  in  which 
the  German  staff  boasts  of  having  secured  this  important 
advantage  to  German  industry. 

While  Great  Britain  forthwith  condemned  this  action 
of  the  Germans,  events  soon  showed  that  it  was  of  great 
advantage  to  the  British  coal  industry.  The  huge  con- 
tinental demands  for  British  coal  in  19 19-1920  enabled  the 
British  coal  industry  to  thrive  as  never  before.  The  govern- 
ment kept  down  the  price  of  coal  in  Great  Britain,  with  a 
view  to  stimulating  domestic  industry,  while  allowing  the 
coal  operators  to  charge  on  their  foreign  sales  "all  that  the 
traffic  would  bear."  The  French  in  fact  paid  as  high  as 
130  and  the  Italians  240  shillings  a  ton,  the  disparity  being 
due  largely  to  greater  depreciation  of  Italian  currency. 

Meanwhile  the  Germans  had  been  recalcitrant  in  deliver- 
ing to  France  the  coal  stipulated  under  the  Treaty  of 
Versailles.  By  the  terms  of  the  Spa  agreement,  however, 
Germany  was  compelled  to  deliver  2  million  tons  of  Ruhr 
coal  per  month.  This  supply  exceeded  French  domestic 
requirements  even  before  the  business  depression  became 
severe,  and  by  the  fall  of  1920  French  railways  and  sidings 
were  literally  congested  with  coal  trains.  Coal  prices  fell 
precipitately — to  23  shillings  per  ton  in  France.  In  order 
to  realize  as  much  as  possible  the  French  government  began 


ECONOMICS  OF  REPARATIONS  PROBLEM  229 

to  sell  excess  coal  to  Holland,  Scandinavia,  and  Italy  for 
whatever  price  it  would  bring.  In  fact,  it  was  sold  at  just 
about  the  cost  of  production  in  Germany. 

England's  market  in  France  was  gone  and  her  shipments 
to  other  countries  were  greatly  restricted.  The  low  standard 
of  living  in  German  coal  fields  thus  fixed  the  price  of 
European  coal.  The  coal  strike  in  England,  which  for  three 
months  paralyzed  all  British  industry,  was  the  direct  result 
of  the  necessity  for  British  coal  owners  to  compete  with 
this  indemnity  coal.  Although  France  profited  somewhat 
by  the  receipt  of  German  coal,  the  Spa  deliveries  were  far 
from  an  unmixed  benefit  to  the  Allies  in  general.  ^  To 
England  they  were  almost  a  source  of  disaster. 

There  is  something  to  be  said,  however,  in  favor  of  the 
shipments,  for  the  very  reason  that  they  broke  the  incipient 
British  coal  monopoly  on  the  continent.  The  prices  of  coal 
were  so  exorbitant  that  great  damage  was  being  done  to 
industry  everywhere.  It  is  true,  however,  that  in  the  end 
the  collapse  of  coal  prices  would  have  come  without  the 
German  competition.  Coal  could  not  long  have  escaped  the 
liquidating  process  to  which  other  industries  were  being 
subjected. 

Export  of  Other  Commodities 

Other  commodities  with  which  Germany  might  hope  to 
make  large  reparation  payments  are  iron  and  steel, 
machinery,  textiles,  chemicals,  and  dyes.  These  commodi- 
ties together  with  coal  made  up  the  bulk  of  German  exports 
before  the  war.  Which  of  them  could  be  shipped  into  Allied 
countries  without  doing  outright  injury  to  Allied  industry? 
Certainly  not  iron  and  steel,  certainly  not  textiles,  certainly 
not  machinery.    As  a  whole  the  Allied  nations  are  more  than 


^  It  will  be  interesting  to  observe  the  attitude  of   France  towards 
German  coal  deliveries  when  once  the  Lens  fields  have  been  reopened. 


230  THE  REPARATIONS  DILEMMA 

fully  equipped  to  supply  their  own  needs  in  all  of  these 
cases.  Chemicals  and  dyestuffs  the  Allies  wish  to  manu- 
facture for  military  reasons.  The  simple  truth  is  that  every 
commodity  with  which  Germany  could  most  readily  pay 
would  seriously  compete  with  Allied  industries. 

This  sweeping  statement  needs  some  qualification,  per- 
haps, for  particular  Allied  nations  might  well  be  willing  to 
receive  certain  of  these  commodities  with  a  view  to  selling 
them  in  other  Allied  nations.  The  coal  delivered  to  France 
is,  of  course,  a  case  in  point.  It  has  recently  been  suggested, 
moreover,  that  France  and  Germany  should  work  out 
together  a  plan  whereby  Germany  can  pay  reparations  to 
the  benefit  of  France  but  to  the  detriment  of  the  industries 
of  England  and  the  United  States.  A  huge  industrial  com- 
bination is  projected  between  French  and  German  capitalists, 
whereby  French  ores  and  German  coal  might  be  united  in 
the  manufacture  of  low-priced  iron  and  steel  which  could 
undersell  British  and  American  iron  and  steel  even  in  their 
own  markets.  Whether  anything  will  come  of  this  scheme 
is  very  doubtful.  It  suggests,  however,  interesting  possi- 
bilities of  friction  within  the  Entente. 

Are  there  not  other  commodities,  however,  with  which 
Germany  can  pay  that  will  not  disrupt  Allied  industries, 
either  directly  or  indirectly?  Undoubtedly  there  are  some; 
and  we  hope  the  reader  will  bear  in  mind  that  the  title  of 
the  preceding  chapter  is  not  "The  Allies  Are  Unwilling  to 
be  Paid  Anything,"  but  only  "How  Much  Are  the  Allies 
Willing  to  be  Paid?"  Certain  materials  for  reconstruction, 
in  limited  quantities,  may  yet  be  accepted.  It  has  been  sug- 
gested, moreover,  that  many  needed  public  school  buildings 
might  be  erected  in  England  if  German  materials  were 
furnished  free.  Other  commodities  that  have  been  men- 
tioned are  timber,  potash,  and  sugar — these  by  the  Right 
Hon.  R.  McKenna,  chairman  of  the  London  Joint  City  and 


ECONOMICS  OF  REPARATIONS  PROBLEM  23 1 

Midland  Bank,  Ltd.  He  does  not,  however,  think  that  much 
can  be  paid  in  this  way.  And  the  memorandum  of  the  New 
Commerce  prepared  for  the  British  National  Committee  ot 
the  International  Chamber  of  Commerce  (London,  June, 
192 1 )  on  the  subject,  "The  Indemnity  and  Its  Effects  on 
Trade,"  says  that  "every  commodity  suggested  will  be  found 
open  to  grave  objection  quite  apart  from  possible  mis- 
management." 

Payments  by  Small  Consignments 

One  final  suggestion  remains  to  be  considered.  Re- 
cognizing the  havoc  that  would  be  wrought  upon  certain 
Allied  industries  if  Germany  were  to  make  the  bulk  of  her 
payments  in  a  few  types  of  selected  commodities,  such  as 
iron  and  steel,  textiles,  machinery,  etc.,  some  writers  have 
advanced  the  doctrine  that  Germany  should  not  pay  the 
full  amount  through  exporting  great  quantities  of  a  few 
commodities,  but  rather  by  exporting  small  quantities  of 
many  commodities.  The  implication  is  that  the  Allies 
could  receive  small  consignments  of  every  type  of  German 
product  without  disrupting  their  own  industries. 

There  are  two  important  objections  to  this  plausible 
suggestion.  In  the  first  place,  if  Germany  is  to  be  denied  the 
opportunity  to  pay  with  those  commodities  that  she  can 
produce  most  efficiently  and  in  the  largest  quantity,  and 
is  to  be  compelled  to  diversify  her  exports  and  to  ship 
abroad  only  such  precise  quantities  of  each  commodity  as 
will  not  prove  a  detriment  to  Allied  industries,  the  total 
amounts  that  she  could  pay  would  obviously  be  very  greatly 
reduced.  The  administrative  problems  involved  in  such 
a  procedure  would,  moreover,  be  of  an  impossible  nature. 

In  the  second  place,  those  who  argue  that  the  Allies 
would  find  it  beneficial  to  receive — in  not  too  great  quanti- 
ties— many   types    of    German   goods,    overlook   the    real 


232  THE  REPARATIONS  DILEMMA 

question.  It  would  be  nonsense  to  suppose  that  the  Allied 
nations  do  not  want  any — indeed  that  they  do  not  want 
many — German  goods.  But  the  real  issue  is  whether  they 
want  German  exports  greatly  to  exceed  German  imports; 
whether  they  wish  Germany  to  be  able  to  buy  from  them  as 
much  as  they  wish  to  buy  from  Germany.  We  come  back 
once  more  to  the  proposition  that  what  is  desirable  is  trade 
— balanced  trade.  If  by  requiring  reparations  payments 
we  make  it  impossible  for  Germany  to  use  exports  as  a  means 
of  purchasing  imports,  will  not  the  loss  of  Allied  markets 
in  Germany  more  than  offset  any  possible  gains  from  repara- 
tions receipts? 

Effect  on  the  Foreign  Exchanges 

In  preceding  pages  we  have  discussed  the  effects  of  the 
payment  of  reparations  and  Allied  debts  upon  trade  and 
industry.  We  have  seen,  however,  that  the  payments  are 
actually  made  mainly  in  bills  of  exchange.  We  may  now 
consider  what  effects  the  payment  of  periodical  instalments 
of  reparations  has  upon  the  foreign  exchanges. 

Since  the  beginning  of  reparation  payments  under  the 
terms  of  the  Allied  ultimatum,  accepted  by  Germany  on 
May  II,  the  exchanges  have  fluctuated  more  violently  than 
ever.  The  graph  on  page  200  pictures  the  results  of  the 
reparation  payments  both  on  German  and  Allied  exchanges. 
The  trouble  appears  to  be  twofold.  On  the  one  hand,  the 
necessity  for  Germany  to  acquire  large  amounts  of  accept- 
able exchange  with  which  to  meet  reparation  instalments 
periodically  bulls  the  market  for  the  exchange  purchased. 
On  the  other  hand,  exchange  speculators  seek  to  take  advan- 
tage of  the  situation  and  through  their  purchasing  and  selling 
activities  greatly  increase  the  range  of  fluctuations. 

Under  the  terms  of  the  May  settlement  it  was  first  re- 
quired that  the  reparations  should  be  paid  in  American 


ECONOMICS  OF  REPARATIONS  PROBLEM      233 

exchange.  The  gyrations  in  the  value  of  foreign  currencies 
as  compared  with  the  American  dollar  that  resulted  led  the 
Reparations  Commission  to  modify  this  requirement  with 
reference  to  subsequent  payments  and  to  require  the  remis- 
sion of  exchange  on  various  countries.  As  the  chart  on 
page  200  indicates,  however,  the  unsettling  effects  of  the 
reparation  payments  upon  the  exchanges  have  not  been 
overcome.  The  effects  upon  Allied  exchanges,  not  to  men- 
tion the  effects  upon  the  value  of  the  mark,  have  been  so 
disastrous  that  there  has  been  serious  official  consideration 
of  a  postponement  of  further  reparation  payments  for  a 
year,  in  the  vain  hope  that  meanwhile  some  solution  of  the 
exchange  aspect  of  the  problem  may  be  found. 

The  same  exchange  difficulties  would  be  met  if  the  Allied 
nations  actually  undertook  the  payment  of  their  debts  to  the 
United  States.  Whenever  large  purchases  of  bills  of  ex- 
change had  to  be  made  with  which  to  meet  instalments, 
foreign  exchanges  would  fall  in  terms  of  American  money. 
The  door  would  meanwhile  be  left  wide  open  for  the 
violently  disturbing  effects  of  speculative  activities.  The 
fact  that  the  exchanges  might  again  rise  after  the  instal- 
ments had  been  paid,  does  not  change  the  fundamental 
difficulty.  For,  as  we  saw  in  the  chapter  devoted  to  a  dis- 
cussion of  the  foreign  exchanges,  the  greatest  evil  in  con- 
nection with  the  exchange  situation  lies  in  the  rapid 
fluctuations  of  exchange  rates. 

Through  this  consideration  of  the  effects  of  reparation 
and  inter-Allied  debt  payments  upon  the  exchanges,  we 
again  come  back  to  the  paramount  question  of  the  effects  of 
reparation  and  debt  payments  upon  the  trade  and  industry 
of  the  Allied  countries.  Fluctuating  exchanges  are  signifi- 
cant only  in  so  far  as  they  affect  trade  between  countries. 
As  we  found  in  the  chapter  on  the  foreign  exchanges, 
fluctuating    exchange    quotations    mean    greatly    increased 


234  THE  REPARATIONS  DILEMMA 

risks  of  business  operations,  and  hence  a  reduction  in 
foreign  trade.  If  the  United  States  insists  upon  the  pay- 
ment of  AlHed  debts  to  the  United  States,  our  foreign  trade 
will  be  still  further  penalized  through  the  unsettling  effects 
of  such  payments  upon  the  exchanges.  If  the  Allied  nations 
insist  upon  the  payment  of  German  reparations,  they  must 
take  the  consequences  in  the  form  of  reduced  exports  to 
Germany  and  elsewhere. 

Allied  Debts  and  American  Taxation 

Uppermost  in  the  mind  of  the  average  citizen  is  the 
thought  that  when  European  governments  pay  their  debts  to 
the  United  States,  the  burden  of  taxation  in  the  United 
States  will  be  greatly  alleviated,  just  as  the  average  French- 
man expects  to  find  his  taxation  burden  reduced  when 
German  reparations  are  paid.  It  may  be  recalled  that  of  the 
$24,000,000,000  of  our  government  debt,  approximately 
$10,000,000,000  is  represented  by  loans  to  Allied  govern- 
ments. The  individuals  who  own  Liberty  bonds,  however, 
have  the  promises  to  pay  of  the  United  States  government ; 
and  in  consequence,  the  government  must  pay  interest  on  the 
Liberty  bonds  whether  or  not  it  receives  interest  on  the 
foreign  loans.  Is  it  not  true,  therefore,  that  if  the  Allied 
nations  were  to  pay  interest  on  their  debts  to  the  United 
States,  that  the  tax  money  which  the  government  has  to 
raise  annually  would  be  reduced  by  an  amount  equal  to  5 
per  cent  on  $10,000,000,000,  or  $500,000,000?  And  is  it 
not  true  that  if  the  principal  of  the  Allied  debts  is  ultimately 
paid  to  the  United  States,  we  shall  have  received  from 
abroad  the  means  of  liquidating  $10,000,000,000  of  debt 
which  would  otherwise  have  to  come  out  of  the  pockets  of 
the  American  people?  Would  not  this  consideration  prove 
that  it  is  advantageous  to  the  United  States  to  have  the 
foreign  obligations  paid? 


ECONOMICS  OP  REPARATIONS  PROBLEM  235 

It  is  undoubtedly  true  that  if  the  United  States  govern- 
ment received  $500,000,000  annually  as  interest  on  the 
Allied  debts,  it  would  not  have  to  raise  that  $500,000,000 
from  domestic  taxpayers.  At  first  blush  it  would  therefore 
appear  that  the  taxpayers  having  been  saved  $500,000,000, 
the  nation  would  in  consequence  be  $500,000,000  richer. 
This  is,  however,  only  a  part  of  the  story. 

It  will  be  remembered  that  foreign  governments  would 
have  to  secure  the  means  of  paying  interest  to  the  United 
States  government  through  shipping  to  the  United  States 
more  commodities  than  they  purchased  from  the  United 
States.  Only  by  an  excess  of  European  exports  to  the 
United  States,  over  European  imports  from  the  United 
States,  can  Europe  secure  a  supply  of  bills  of  exchange 
which  could  be  used  in  meeting  these  obligations  to  the 
United  States.  It  must  again  be  emphasized  that  if  we 
compel  Europe  to  use  her  present  exports  to  pay  past  obliga- 
tions, she  cannot  also  use  them  in  buying  present  and  future 
American  goods.  Europe  has  been  unable  to  buy  much  from 
us  during  the  past  year  or  so,  even  though  we  were  not 
asking  the  payment  of  interest.  Compel  Europe  to  use  her 
meager  present  purchasing  power  to  settle  past  debts 
and  our  present  exports  would  dwindle  almost  to 
zero. 

Now  if  the  losses  resulting  to  our  trade  and  industry 
from  a  great  reduction  in  our  exports  and  a  great  increase 
in  our  imports  should  amount  to  more  than  $500,000,000 
annually,  one  would  have  to  conclude  that  the  nation  as  a 
whole  would  lose  more  than  it  gaintd.  While  the  total  of 
taxes  would  be  reduced  by  $500,000,000,  the  total  means  of 
paying  taxes  would  be  reduced  by  more  than  $500,000,000. 
And  if  the  principal  were  to  be  gradually  paid  over  a  long 
period  of  years,  it  would  benefit  the  United  States,  only 
provided  the  total  loss  to  the  United  States  in  consequence 


236  THE  REPARATIONS  DILEMMA 

of  the  industrial  readjustments  that  would  be  involved  did 
not  exceed  $10,000,000,000. 

Loss  from  Trade  Readjustment 

It  is,  of  course,  impossible  to  compute  with  any  degree 
of  accuracy  the  extent  to  which  our  annual  income  would 
be  reduced  in  consequence  of  the  disrupting  effects  of  huge 
debt  payments.  That  it  might  annually  well  exceed  the 
amount  of  interest,  $500,000,000,  plus  principal  instalments, 
is,  however,  not  at  all  improbable.  This  for  the  reasons 
discussed  in  preceding  pages  of  this  chapter. 

It  will  help  to  an  understanding  of  this  taxation  aspect 
of  the  problem  if  it  be  recalled  that  during  the  period  when 
the  United  States  was  shipping  abroad  the  $10,000,000,000 
worth  of  goods  which  gave  rise  to  the  debt,  the  funds  raised 
by  the  United  States  government  for  the  purpose  of  paying 
the  exporters  of  the  war  supplies  did  not  press  heavily  upon 
the  American  people.  ^  Because  of  the  huge  profits  arising 
out  of  war  operations,  American  business  men  purchased 
large  quantities  of  government  bonds  and  paid  large  taxes 
without  serious  inconvenience.  In  191 9  and  the  early 
months  of  1920,  when  huge  additional  credits  were  being 
extended,  and  when  post-war  exportations  continued  at  the 
war-time  level,  the  interest  on  the  total  government  debt  was 
met  with  relative  ease,  notwithstanding  the  exaggerated 
murmuring  that  emanated  from  certain  quarters  against  the 
ruinous  burden  of  taxation.  We  do  not  mean  to  imply  that 
there  was  no  burden,  but  only  to  contend  that  the  fiscal  prob- 
lem was  not  particularly  difficult  so  long  as  business 
prosperity  was  at  its  height.  ^ 

If  the  process  is  now  reversed  by  the  shipment  of  a  great 


'It  must  be  stated  here,  however,  that  a  considerable  percentage  of 
the  total  came  out  of  bank  inflation  rather  than  out  of  taxes. 
*  Recall  the  discussion  on  pages  224-225. 


ECONOMICS  OF  REPARATIONS  PROBLEM  237 

excess  of  goods  to  the  United  States,  the  resulting  business 
depression  might  well  make  the  burden  of  meeting  the  les- 
sened total  volume  of  taxes  greater  than  that  of  meeting  the 
larger  volume  under  conditions  where  our  industries  were 
not  compelled  to  undergo  thorough  and  prolonged  readjust- 
ment. 

One  further  aspect  of  this  problem  should  be  noted. 
While  the  nation  as  a  whole  would  probably  not  be  benefited 
from  a  fiscal  point  of  view,  certain  classes  of  people  would 
find  some  alleviation  of  their  tax  burdens.  People  on  fixed 
incomes,  which  are  relatively  little  affected  by  business 
depression,  would  undoubtedly  find  that  the  payment  of 
foreign  debts  to  the  United  States  government  gave  them 
taxation  relief.  But  on  the  other  hand,  those  who  were 
thrown  out  of  employment  as  a  result  of  readjustment  and 
depression  would  find  the  payment  of  such  debts  in  the 
nature  of  a  calamity.  While  their  taxes  would  be  reduced 
a  little,  their  incomes  would  be  very  greatly  reduced.  The 
same  would  also  be  true  of  those  whose  incomes  had  been 
previously  derived  from  profits  in  industries  which  would 
be  disrupted  in  consequence  of  the  trade  readjustments. 
Even  many  bondholders  who  are  in  the  fixed  income  class 
would  suffer  in  consequence  of  the  failure  of  certain  lines 
of  industry. 


CHAPTER  XVI 

THE  FRENCH-GERMAN  RAPPROCHEMENT 

New  Agreement 

Here  and  there  in  the  preceding  discussions  of  the 
reparations  dilemma,  reference  has  been  made  to  the  French- 
German  rapprochement  that  has  been  worked  out  since  the 
reparation  settlement  of  May,  192 1.  This  coming  together 
in  an  agreement  with  reference  to  the  delivery  of  German 
materials  for  reconstruction,  has  been  widely  heralded  as  a 
solution  of  the  reparations  problem.  In  the  present  chapter 
we  shall  outline  the  nature  of  the  rapprochement  in  question 
and  discuss  its  limitations. 

We  have  found  that  from  the  time  of  the  Armistice  it 
has  been  assumed  that  Germany  would  pay  in  kind  some  of 
the  reparations  demanded.  We  have  seen,  moreover,  that 
certain  commodities  have  in  limited  quantities  been  already 
utilized  for  the  purpose,  such  as  coal,  ships,  livestock,  rolling 
stock,  etc.  We  have  also  noted  that  while  in  theory  France 
has  always  been  willing  to  receive  German  goods,  yet  when 
it  actually  came  to  agreeing  to  accept  the  designated  com- 
modities there  has  in  most  cases  been  first  hesitation,  and 
then  refusal  to  receive  the  goods  through  fear  of  the  effects 
upon  French  industries.* 

A  new  agreement  has,  however,  been  worked  out  this 
summer  between  M.  Loucheur,  French  Minister  of  the  Devas- 
tated Regions,  and  Dr.  Rathenau,  German  Minister  of  Re- 
construction, v/hereby  it  is  believed  that  Germany  will  now 
offer  and  France  will  now  accept  materials  for  the  reconstruc- 
tion of  the  devastated  areas.  While  the  full  details  of  the  plan 


*  See  discussion  on  page  208. 

238 


THE  FRENCH-GERMAN  RAPPROCHEMENT  239 

have  not,  to  our  knowledge,  been  made  public,  we  are  in- 
formed that  it  is  to  be  administered  substantially  as  follows : 
Persons  in  the  devastated  regions  whose  property  has 
been  destroyed  during  the  war,  or  who  have  other  claim  for 
reparation,  must  first  prove  their  claim  to  the  French 
government.  They  then  receive  from  the  government  an 
order  for  the  amount  required  to  rehabilitate  the  property 
destroyed.  With  this  order  they  go  to  one  of  the  several 
hundred  financial  agencies  to  be  officially  established  in  the 
devastated  areas.  There  they  find  German  and  French  offi- 
cials who  together  examine  these  government  orders;  and 
in  case  the  orders  are  satisfactory,  a  group  of  individuals 
desiring  German  materials  is  formed  by  the  official  agency 
and  is  put  in  direct  communication  with  German  manufac- 
turers who  produce  the  commodities  desired.  The  price, 
date  of  delivery,  etc.,  may  be  negotiated  as  in  any  ordinary 
private  business  transaction.  In  case  of  failure  to  reach 
an  agreement  with  a  German  manufacturer,  it  is  provided 
that  a  commission  of  three,  composed  of  one  Frenchman, 
one  German,  and  a  third  person  chosen  by  common  accord, 
shall  fix  the  terms.  The  price  must  correspond  with  the 
normal  price  in  the  interior  of  France  for  the  material  in 
question.  The  German  manufacturer,  upon  the  fulfilment 
of  the  contract,  presents  the  order  to  the  German  govern- 
ment for  reimbursement.  The  German  government,  in  its 
turn,  must  of  course  raise  the  necessary  funds  either  through 
taxation  or  through  putting  further  pressure  on  the  already 
overworked  paper  money  printing  press.  The  value  of  the 
transaction  is  then  credited  to  the  German  government  in 
the  reparations  account. 

Payment  in  Goods 

Under  this  agreement  Germany  is  to  deliver  to  France 
7  billion  gold  marks  worth  of  goods  in  the  next  five  years, 


240  THE  REPARATIONS  DILEMMA 

provided  this  is  compatible  with  the  possibiHties  of  produc- 
tion and  the  maintenance  of  the  social  and  economic  life 
of  Germany.  The  agreement  is  also  subject  to  German 
limitations  as  to  supplies  of  raw  material.  The  plan  is  con- 
ceived with  a  view  of  expediting  the  reparation  of  the  devas- 
tated areas.  During  this  period  of  five  years  the  repara- 
tions payments  made  by  Germany  are  to  be  limited  to  the 
2  billion  gold  marks  per  year  plus  the  payments  in  kind 
made  to  France  under  this  agreement.  The  payment  of  7 
billions  in  goods  to  France  is  to  take  the  place,  during  the 
five  years,  of  the  26  per  cent  of  German  exports  which  it 
was  agreed  last  spring  should  form  the  indeterminate  part 
of  Germany's  reparation  payments.  That  part  of  the  26 
per  cent,  however,  which  remains  unpaid  by  Germany  after 
the  deduction  of  the  yearly  payments  under  the  Loucheur- 
Rathenau  agreement  although  suspended  for  five  years,  will 
be  paid  by  Germany  to  the  Reparations  Commission  in  yearly 
instalments  beginning  in  1926. 

It  will  be  seen  that  this  Loucheur-Rathenau  agreement 
increases  the  total  of  reparations  which  Germany  engages 
herself  to  pay  as  compared  with  the  amounts  stipulated  in 
the  settlement  made  last  spring.  There  is  a  further  provi- 
sion that  only  35  per  cent  of  the  7  billions  of  material  is  to 
be  debited  against  France  in  the  reparations  account.  In 
this  way  France  expects  to  escape  from  owing  large  sums 
to  the  Reparations  Commission.  The  difference  between 
what  is  debited  to  France  in  the  reparation  account  and 
what  Germany  actually  pays  in  goods,  that  is  to  say,  65 
per  cent  of  the  goods  delivered  by  Germany  during  the  five 
years,  will  be  deducted  from  the  payments  which  Germany 
is  to  make  to  France  after  1926.  It  is  with  a  view  to  budge- 
tary relief  that  only  35  per  cent  of  these  payments  in  kind 
are  to  be  deducted  from  France's  share  in  the  reparation 
account.    The  rest  of  the  French  claim  for  reparations  dur- 


THE  FRENCH-GERMAN  RAPPROCHEMENT  241 

ing  these  five  years  will  supposedly  be  paid  in  cash  and  con- 
stitutes 52  per  cent  of  the  2  billion  gold  marks  in  the  repara- 
tion settlement  of  last  spring. 

In  view  of  the  added  burden  placed  upon  Crermany,  it 
is  not  surprising  to  find  that  Dr.  Rathenau  insisted  on  in- 
cluding the  provisos  mentioned  above,  namely,  that  Ger- 
many would  engage  to  make  these  deliveries  if  it  were  com- 
patible with  the  maintenance  of  her  economic  and  social 
life,  and  if  her  supplies  of  raw  materials  and  her  produc- 
tive capacity  permitted.  In  the  light  of  our  analysis  in 
Chapter  XIII  of  Germany's  capacity  to  pay,  there  need  be 
no  expectation  that  France  will  receive  the  materials  in  the 
volume  contemplated. 

It  will,  moreover,  be  seen  that  to  the  extent  that  Ger- 
many devotes  her  economic  resources  to  the  supplying  of 
these  materials  for  reconstruction,  it  reduces  her  possibili- 
ties of  exporting  other  goods  with  which  to  secure  the  bills 
of  exchange  required  to  meet  the  other  two-thirds  of  the 
French  share.  There  is  thus  a  possibility  that  France  may 
receive  a  smaller  amount  of  funds  for  wiping  out  accumu- 
lated deficits  than  might  otherwise  have  been  the  case ;  while 
the  chance  of  receiving  pension  money,  etc.,  is  likewise  ren- 
dered more  remote.  The  delivery  of  such  materials  would, 
however,  afford  some  relief  to  future  French  budgets,  since 
the  French  government  would  not  henceforth  have  to  de- 
fray the  expenses  of  reconstruction,  except  in  so  far  as  the 
labor  involved  is  concerned. 

This  agreement  between  France  and  Germany  may  also 
seriously  affect  the  amount  of  reparations  that  Italy,  Bel- 
gium, and  Great  Britain  might  otherwise  hope  to  receive. 
The  total  reparation  figures,  as  we  have  hitherto  seen,  are 
fantastic;  Germany  cannot  pay  anything  approaching  the 
sums  demanded.  To  the  degree,  therefore,  that  she  special- 
izes on  making  deliveries  to  France,  she  reduces  the  possible 


242  THE  REPARATIONS  DILEMMA 

payments  to  the  other  Allies.  If  the  plan  works  out  in  this 
fashion,  there  will  be  an  excellent  opportunity  for  dissension 
among  the  recipients.    Indeed,  Britain  has  already  protested. 

Legislative  Action  Necessary 

This  agreement  for  the  delivery  of  materials  appears  to 
disprove,  to  some  extent  at  least,  our  contentions  in  preced- 
ing chapters,  that  France  is  unwilling  to  receive  German 
goods  in  payment  of  reparations.  To  understand  the  forces 
that  have  led  to  this  apparent  willingness  of  France  to  re- 
ceive German  materials  for  reconstruction,  it  is  necessary 
to  reveal  certain  conflicting  interests  within  France.  The 
French  budgetary  situation  has  been  growing  steadily 
worse;  and  the  large  annual  deficits  are  in  considerable 
measure  attributable  to  the  policy  whereby  the  French 
government  has  advanced  the  funds  required  for  the  recon- 
struction of  the  devastated  areas.  Government  experts, 
French  financiers,  and  those  who  are  suffering  most  from 
the  burden  of  taxation,  actual  and  potential,  have  become 
deeply  concerned.  They  feel  that  the  present  method  of 
effecting  the  restoration  of  the  devastated  regions  cannot  be 
allowed  to  go  on.  France  must  get  the  materials  from  Ger- 
many free  of  charge  and  restore  the  devastated  areas  as 
rapidly  as  possible,  to  the  end  that  the  budget  may  not  be 
further  burdened  and  that  French  productive  capacity  may 
be  quickly  restored. 

We  have  seen  that  this  view  has  all  along  had  consider- 
able weight  in  France ;  but  it  has  heretofore  not  been  able  to 
outweigh  the  counter-views  of  French  industrialists,  desir- 
ous of  furnishing  the  materials  required  and  reaping  the 
profits  to  be  obtained  from  government  contracts.  These  in- 
terests, it  may  be  taken  for  granted,  are  still  opposed  to  the 
destructive  competition  of  free  German  materials.  Whether 
they  will  be  able  to  bring  sufficient  pressure  to  bear  to 


THE  FRENCH-GERMAN  RAPPROCHEMENT  243 

prevent  the  operation  of  the  plan  remains  to  be  seen.  It 
must  be  understood  that  the  plan  has  yet  to  receive  the 
sanction  of  the  French  Chamber  and  Senate.  Thus  far  it  is 
merely  an  agreement  between  ministers.  In  the  parlia- 
mentary discussions  still  to  come  one  may  be  certain  that  the 
forces  of  opposition  will  be  strongly  organized. 

Limitations  of  the  Scheme 

Whatever  the  eventual  outcome  of  the  plan,  it  remains 
to  be  noted  that  it  does  not  in  any  event  reach  to  the  heart 
of  the  reparations  question.  From  the  point  of  view  of 
France,  the  following  limitations  must  be  observed : 

1.  It  will  not  provide  money  to  pay  for  the  labor 
involved  in  the  restoration  of  the  devastated  areas. 

2.  It  will  not  pay  for  either  the  labor  or  the  materials 
that  have  been  required  in  reconstruction  work  during  the 
past  two  years.  It  will,  therefore,  not  give  any  positive  relief 
to  the  French  budget,  burdened  by  the  huge  expenditures 
already  made  on  reconstruction.  It  will  not  reimburse  the 
French  for  what  they  themselves  have  already  accomplished. 
In  this  connection  it  is  important  to  note  that  the  French 
contend  that  a  very  considerable  part  of  the  work  of  recon- 
struction has  already  been  completed. 

3.  It  will  not  provide  money  for  either  past  or  future 
pensions;  and  pensions  amount  to  something  like  40  per 
cent  of  the  total  French  reparation  claims. 

4.  The  plan  does  not  cover  the  entire  period  during 
which  it  is  expected  that  Germany  will  make  reparation  pay- 
ments. The  agreement  is  to  last  only  five  years,  by  which 
time  it  is  hoped  that  the  devastated  areas  will  have  been  fully 
restored.^  After  that  the  question  arises,  w^ill  France  be  wil- 
ling to  receive  other  types  of  commodities  in  like  amounts? 


'Recall,  however,  that  one-half  of  these  deliveries  are  to  be  debited 
against  France  on  the  next  five  years'  instalments. 


244  THE  REPARATIONS  DILEMMA 

The  plan,  moreover,  provides  no  means  whatever  for 
paying  Great  Britain  and  the  other  Allies.  The  French 
share  of  the  total  reparations  is  52  per  cent.  Sixty-five  per 
cent  of  the  French  share  and  all  of  the  49  per  cent  due  the 
other  Allies  must  still  be  paid,  if  paid  at  all,  in  funds  arising 
out  of  an  excess  of  ordinary  German  exports  over  imports. 
It  works  out,  therefore,  that  during  the  first  ten  years  only 
about  one-sixth  of  the  total  is  to  be  received  in  materials. 
After  that  this  agreement  makes  no  provision  for  any  pay- 
ments in  kind. 

In  spite  of  this  widely  proclaimed  solution  of  the 
problem,  the  fundamental  reparations  dilemma  still  exists, 
namely,  the  concurrent  insistence  that  Germany  must  pay 
in  full  and  the  refusal  on  the  part  of  the  Allies  to  receive, 
save  in  limited  quantities,  the  goods  with  which  alone  it  is 
possible  for  reparations  to  be  paid. 


CHAPTER  XVII 

POLITICAL  FACTORS  IN  THE  EUROPEAN 
SITUATION 

Political  Backwardness  of  Nations 

This  book  so  far  has  considered  the  economic  decadence 
of  the  world  and  has  endeavored  to  show  that  this  economic 
deterioration  threatens  a  serious  decline  in  civilization. 
Aside  from  the  economic  factors  involved,  there  are  certain 
powerful  political  forces  at  work  which  are  preventing  a 
co-operative  and  rational  effort  toward  European  rehabilita- 
tion. These  will  be  discussed  in  this  and  the  following 
chapter. 

There  can  be  little  doubt  that  the  political  development  of 
Europe  has  not  kept  pace  with  the  economic  development. 
The  economic  interdependence  of  nations  which  has  been 
developing  in  the  last  forty  years  in  connection  with  the 
growth  of  large-scale  production  and  highly  specialized  in- 
dustry, has  found  its  chief  impediment  in  the  stagnation  of 
the  political  ideals  governing  each  nation.  Politically,  nations 
are  in  general  about  where  they  were  before  the  develop- 
ment of  modern  industrialism  made  them  so  closely  inter- 
dependent. Each  one  is  dominated  by  an  individualistic 
nationalist  policy,  finding  its  support  in  antiquated  doctrines 
which  have  among  the  masses  almost  the  power  of  religious 
beliefs.  For  example,  the  United  States,  now  hopelessly 
entangled  in  the  meshes  of  European  economics  and  politics, 
still  harks  back  to  the  doctrine  of  splendid  isolation  of  the 
days  of  Washington.  Each  nation  politically  opposes  inter- 
national co-operation  and  may  be  said  to  be  working  against 
its  own  larger  interests,  since  in  fact  these  interests  are 

245 


246  THE  REPARATIONS  DILEMMA 

interlocked  with  the  interests  of  every  other  nation.  There- 
fore, the  political  life  of  each  nation  is  running  counter  not 
only  to  the  trend  of  world  development,  but  is  also  standing 
in  the  way  of  its  own  participation  in  that  development. 

This  view  may  seem  almost  treasonable  to  national  politi- 
cal policies,  of  venerable  age  and  embedded  in  the  very  souls 
of  nations  through  centuries  of  political  and  military  strife. 
But  it  cannot  be  too  often  repeated  that  the  world  today  has 
changed;  it  has  become  indissolubly  bound  together  in  the 
processes  of  earning  its  daily  bread,  and  these  processes  are 
the  ones  which  affect  the  life  and  well-being  of  the  masses 
of  every  nation.  So  long  as  politics  ignores  these  processes 
in  directing  the  policy  of  nations,  so  long  must  politics  re- 
main in  antagonism  to  the  fundamental  requirements  of 
mankind. 

We  do  not  mean  to  imply  that  through  international 
co-operation  trade  competition  between  nations  can  or 
should  be  eliminated.  We  do  mean  to  contend,  however,  that 
unless  national  political  policies  permit  the  unrestricted  ex- 
change of  commodities  between  nations  and  the  restoration 
of  world  trade  and  industry,  there  is  little  hope — as  indicated 
in  Chapter  XI  on  the  unity  of  the  problem — for  a  restoration 
of  economic  and  political  security,  and  for  some  measure  of 
progress  for  the  masses  of  mankind.  Concretely,  the  post- 
war tendencies  towards  governmental  support  of  trading 
combinations  and  monopolies,  seeking  by  treaty  and  in- 
trigue special  and  exclusive  national  privileges  throughout 
the  world,  must  give  way  to  equal  trading  opportunities  as 
between  the  individuals  of  different  nations.  Concretely, 
also,  the  tariff  and  trade  barriers  erected  by  the  new  nations 
of  central  and  eastern  Europe,  by  the  old  nations  of  central 
and  western  Europe,  and  by  the  great  republic  of  the  West,  ^ 


*This  question  will  be  further  treated  in  the  third  part  of  the  book. 


POLITICAL  FACTORS  IN  SITUATION  247 

must  not  be  permitted  to  stand  in  the  way  of  the  restoration 
of  the  world's  trade  and  commerce. 

Clash  of  Political  and  Economic  Interests 

The  war,  by  impoverishing  nations  and  upsetting  com- 
merce and  industry  has  accentuated  the  opposition  between 
national  political  aims  and  world  economic  needs.  Great 
masses  of  the  population  whose  very  existence  had  been 
made  possible  by  the  development  of  economic  interna- 
tionalism, are  now  at  the  mercy  of  destructive  political 
policies  opposed  to  international  co-operation.  War,  the 
backbone  of  political  reaction,  has  killed  any  movement  for 
international  co-operation  that  had  begun  to  grow  before 
19 14.  For  this  reason  the  League  of  Nations  was  so 
organized  as  largely  to  defeat  its  own  purpose. 

The  war  and  the  peace  have  left  a  heritage  of  hatred, 
vengeance,  and  distrust  among  the  nations  of  Europe,  which 
has  saddled  upon  statesmen  a  resulting  habit  of  concealment, 
misrepresentation,  and  distortion.  How  otherwise  could 
ministers  keep  in  office  and  work  out  a  plan  of  reconstruc- 
tion when  every  issue  had  been  falsified  in  the  public  con- 
sciousness by  the  dogma  of  hate?  Even  at  the  beginning 
of  the  Peace  Conference  delegates  stated  that  they  could  not 
discuss  openly  European  settlements.  This  could  only  mean 
that  they  could  not  give  to  the  public  the  real  reasons  for 
decisions  reached.  We  do  not  contend  that  this  situation 
could  have  been  otherwise;  we  only  wish  to  call  attention 
to  actual  conditions  and  to  their  effects. 

The  people  of  Europe,  fed  on  untruthful  and  misleading 
propaganda,  deliberately  intended  during  the  war  to  fan 
their  passions  into  flame,  were  in  no  frame  of  mind  after 
the  war  either  to  view  the  problems  of  peace  through  reason, 
or  to  give  unbiased  consideration  to  facts  which  would 
stand  the  test  of  honest  research.    For  this  reason  one  cannot 


248  THE  REPARATIONS  DILEMMA 

find  the  real  purposes  of  governments  in  the  conflicting 
pubHshed  statements  of  political  leaders.  They  must  largely 
be  sought  in  the  exigencies  of  domestic  politics. 

Hoodwinking  the  Public 

There  have  always  been  two  strata  of  policy  behind 
every  political  action  of  governments  in  Europe.  One 
stratum,  founded  on  old  political  dogmas,  whose  utility  has 
long  since  departed,  was  fabricated  for  public  consumption 
and  delicately  suited  to  its  palate.  The  other  stratum,  based 
upon  actual  facts,  is  for  the  information  of  foreign  offices 
only ;  it  varies  to  a  greater  or  lesser  degree  with  the  policies 
publicly  announced.  It  is  for  this  reason  that  representatives 
of  the  United  States  government,  who  first  went  to  Europe 
after  the  war,  were  astonished  at  the  cynicism  of  public  men 
in  the  countries  they  visited. 

This  divergence  between  the  public  and  the  private  views 
of  political  leaders  in  Europe  did  not  produce  before  the  war 
such  disastrous  effects  as  now  threaten  in  the  crumbling  of 
the  economic  and  social  structure  of  Europe.  The  war,  like 
an  earthquake,  brought  a  complete  separation  between  the 
two  strata  of  political  life.  In  the  end  parliamentary 
government  depends  on  public  opinion,  and  the  great  prob- 
lem now  is  how  to  bring  about  reconstruction  in  accordance 
with  reason  and  reality  when  public  passion  is  still  seething 
in  the  overheated  furnace  of  nationalism,  and  when  public 
opinion  formed  in  the  twisted  and  misshapen  mold  of  war 
has  ceased  to  carry  its  load  in  the  political  structure. 
Public  opinion  today  rests  so  largely  on  supposititious  data, 
far  removed  from  reality,  that  it  has  become  a  factor  of 
danger  rather  than  of  safety  to  the  State. 

It  is  true  that,  owing  to  the  curb  of  uneducated  and 
shifting  public  opinion,  leadership  in  a  democracy  has 
always  labored  under  the  disadvantage  that  it  could  not 


POLITICAL  FACTORS  IN  SITUATION  249 

carry  through  a  consistent  single-minded,  and  therefore 
effective,  plan  of  action.  In  pre-war  times,  however, 
democracy  overcame  its  handicap  of  lesser  efficiency  by 
assuring  greater  opportunity  and  wider  freedom  to  the 
masses  of  people.  Today  the  need  and  danger  of  the  civi- 
lized world  is  so  great  that  this  curb  of  popular  opinion, 
changed  to  a  lash  of  fury  by  the  passions  and  the  propa- 
ganda born  of  war,  threatens  to  drive  statesmanship  into 
far-reaching  disaster. 

The  situation  is  further  endangered  by  the  inability  of 
statesmen,  under  the  sway  of  their  own  political  oratory, 
to  discern  the  true  significance  of  the  complicated  forces 
with  which  they  are  dealing.  Leadership  in  European 
democracy  threatens  again  to  fall  into  the  hands  of  "The 
Four  Horsemen  of  the  Apocalypse" — Conquest,  War, 
Famine,  and  Death.  From  this  dread  quadrumvirate  only 
statesmanship  which,  like  Lincoln's,  is  fearless  of  political 
death,  can  rescue  civilization. 

Situation  Realized  by  Statesmen 

It  is  not  to  be  supposed  that  at  this  late  date  Allied 
statesmen  are  altogether  ignorant  either  of  the  gravity  of 
the  European  economic  situation  or  of  the  dilemma  of  repa- 
rations. As  we  have  previously  indicated,  the  utter  con- 
fusion of  mind  that  prevailed  at  the  time  of  the  Armistice 
has  in  large  measure  been  dissipated  by  contact  during  the 
last  two  years  with  the  practical  problems  of  reparations 
administration.  Premiers  Lloyd  George  and  Briand,  at 
least,  knew  last  winter,  at  the  very  time  the  ultimatum  of 
Paris  was  drawn,  that  the  Allied  nations  themselves  were 
unwilling  to  receive  from  Germany  the  payments  demanded 
under  the  threat  of  further  military  occupation.  The  fol- 
lowing quotations  constitute  the  proof  of  this  assertion — 
the  first  being  from  Lloyd  George : 


250  THE  REPARATIONS  DILEMMA 

"What  I  have  put  forward  Is  an  expression  of  the  views 
of  all  the  experts  .  .  .  Everyone  wants  gold,  which  Ger- 
many has  not  got;  and  they  will  not  take  German  goods. 
Nations  can  only  pay  debts  by  gold,  goods,  services,  or  bills 
of  exchange  on  nations  which  are  its  debtors. 

"The  real  difficulty  ...  is  due  to  the  difficulty  of  secur- 
ing payment  outside  the  limits  of  Germany.  Germany  could 
pay — pay  easily — inside  her  own  boundary,  but  she  could 
not  export  her  forests,  railways,  or  land  across  her  own 
frontiers  and  make  them  over  to  the  Allies.  Take  the  rail- 
ways, for  example.  Suppose  the  Allies  took  possession  of 
them  and  doubled  the  charges ;  they  would  be  paid  in  paper 
marks  which  would  be  valueless  directly  they  crossed  the 
frontier. 

"The  only  way  Gerrnany  could  pay  was  by  way  of  ex- 
ports— ^that  is,  by  difference  between  German  imports  and 
exports.  If,  however,  German  imports  were  too  much  re- 
stricted, the  Germans  would  be  unable  to  obtain  food  and 
raw  materials  necessary  for  their  manufacturers.  Some  of 
Germany's  principal  markets — Russia  and  central  Europe 
— were  no  longer  purchasers,  and  if  she  exported  too  much 
to  the  Allies,  it  meant  the  ruin  of  their  industry  and  lack  of 
employment  for  their  people.  Even  in  the  case  of  neutrals, 
it  was  only  possible  generally  to  increase  German  exports  by 
depriving  our  traders  of  their  markets."  ^ 

The  second  is  from  Premier  Briand,  made  before  the 
French  Chamber  and  Senate  on  February  3,  1921 : 

"We  must  not  lose  sight  of  the  fact  that  in  order  to  pay 
us  Germany  must  every  year  create  wealth  abroad  for  her- 
self by  developing  her  exports  and  reducing  her  imports  to 
strictly  necessary  things.  She  can  only  do  that  to  the  detri- 
ment of  the  commerce  and  industry  of  the  Allies.     That  is 

'  The  London  Times,  January  28,  1921. 


POLITICAL  FACTORS  IN  SITUATION  251 

a  Strange  and  regrettable  consequence  of  facts.  The  placing 
of  an  annuity  on  her  exports,  payable  in  foreign  values, 
will,  however,  correct  as  much  as  possible  this  paradoxical 
situation." 

Contradictory  Statements 

In  some  respects  this  statement  of  the  French  Premier  is 
an  amazing  one.  While  admitting  that  the  Allies  are  unwill- 
ing to  permit  Germany  to  increase  her  exports  for  fear  of 
the  consequences  upon  Allied  industries,  he  adds  that  the 
annuity  on  German  exports,  which  in  this  Paris  settlement 
was  12  per  cent,  will  solve  the  dilemma  "as  much  as  possi- 
ble." Now  the  truth  is  that  this  12  per  cent  tax  provision 
merely  added  an  indeterminate  amount  to  the  total  repara- 
tions that  Germany  would  have  to  pay ;  and  the  1 2  per  cent 
portion,  along  with  the  rest,  would  have  to  be  paid  by  the 
exportation  of  German  goods. 

Reading  between  the  lines,  one  may  perhaps  infer  that 
Premier  Briand  thought  that  the  12  per  cent  tax  might  re- 
duce German  exports,  and  thus  prevent  the  disastrous  effects 
of  German  competition  upon  Allied  industries.  If  so,  one 
is  desirous  of  knowing  how  Germany  is  to  pay  when  Briand 
himself  admits  that  an  excess  of  exports  over  imports  con- 
stitutes the  only  means  of  payment.  Or,  perhaps,  what  one 
finds  between  the  lines  is  a  deliberate  intention  to  obscure 
and  confuse  the  issues. 

The  statement  is  also  interesting  in  view  of  the  fact 
that  the  Allies  are  just  as  unwilling  to  permit  the  German 
government  to  restrict  imports,  as  to  permit  an  expansion 
of  German  exports.  The  reader  will  recall  in  this  connec- 
tion the  discussion  of  the  German  attempt  to  prevent  the 
importation  of  luxuries  through  the  "hole  in  the  west,"  and 
its  nullification  by  the  Allies.  ^ 

'  See  page  193. 


252  THE  REPARATIONS  DILEMMA 

It  is  also  interesting,  not  to  say  enlightening,  to  contrast 
the  statement  of  Lloyd  George  given  above  with  his  ulti- 
matum pronouncement,  a  few  weeks  later,  in  March,  when 
he  said: 

"We  have  simply  insisted  that  Germany  pay  the  repara- 
tions which  she  owes  ,  .  .  We  have  not  asked  more.  We 
cannot  ask  less."  "Unless  we  learn  by  Monday  next  that 
Germany  is  ready  to  execute  the  demands  of  Paris  .  .  . 
The  Allies  are  agreed  to  the  following  decisions."  * 

German  Attitude 

Allied  statesmen  were  not  alone  in  avoiding  the  real  issue 
in  the  settlement.  They  found  substantial  help  from  the 
Germans  in  escaping  official  confession  of  the  real  dilemma 
and  the  consequent  wrath  of  their  own  people  whom  they 
had  led  to  expect  far  more  than  could  possibly  be  realized. 
It  appears  that  the  haze  which  befogged  Allied  statesmen 
also  obscured  the  vision  of  the  Germans,  who  might  have 
utilized  the  dilemma  to  their  own  advantage.  The  German 
government,  however,  took  every  occasion  to  obstruct  the 
work  of  the  Reparations  Commission.  The  proposals  made 
by  them  in  London  were  on  their  face  inacceptable  to  the 
Allies,  and  in  the  words  of  Lloyd  George  constituted  a  re- 
pudiation of  settlements  made  at  Versailles.  Simons,  the 
German  Minister  of  Foreign  Affairs  was  accused  by  Lloyd 
George  of  declaring  in  public  speeches  that  Germany  was  not 
responsible  for  the  war.  It  is  difficult  to  explain  the  dilatory 
and  vexatious  tactics  of  the  Germans  when  an  open  state- 
ment of  the  issue  would  have  brought  to  the  light  of  day 
the  real  difficulty,  and  would  have  materially  assisted  in  plac- 
ing Germany  in  a  tenable  and  favorable  position  before  the 


*  Conference  of  London,  March  3,  1921,  Answer  of  Allies  to  Ger- 
many by  David  Lloyd  George.  For  details  of  the  measures  to  be  taken, 
see  page  217. 


POLITICAL  FACTORS  IN  SITUATION  253 

world.  It  is  one  of  the  wonders  of  modern  times  that  Ger- 
man statesmen  did  not  say  to  the  AHies,  in  the  words  of 
Norman  Angell :  ^ 

"It  is  common  ground  that  we  can  only  pay  in  commodi- 
ties. If  you  will  indicate  the  kind  and  quantity  of  goods 
we  shall  deliver,  and  will  facilitate  the  import  into  Ger- 
many of,  and  the  payment  for,  the  necessary  food  and  raw 
material,  we  will  accept — on  that  condition — even  your 
figures  of  reparation." 

It  may  be  possible,  however,  that  the  Germans  feared 
to  make  the  issue  clear  before  the  people  of  the  Entente 
nations.  If  in  the  post-war  psychology  of  peoples  it  were 
really  understood  that  only  a  small  portion  of  reparations 
could  be  extracted  from  Germany,  would  there  not  have 
been  a  cry  in  France  for  a  different  kind  of  payment? 
Would  not  popular  opinion  have  demanded  outright  a  per- 
manent cession  of  Rhineland,  and  perhaps  even  of  the  Ruhr 
coal  fields  ?  "If  Germany  cannot  pay  in  money  or  goods,  let 
her  settle  the  bill  by  territory." 

Mystery  of  Motives  Actuating  Statesmen 

What  is  the  explanation  of  the  contradictory  statements 
of  Allied  statesmen?  What  were  their  real  purposes?  In 
the  thickly  carpeted  inner  offices  of  Downing  Street  and  the 
Quai  d'Orsay,  where  perfect  quiet  reigns  and  no  turmoil 
reaches  them  from  the  outside  world,  what  thoughts  were 
directing  M.  Briand  and  Mr.  Lloyd  George?  Whispering 
officials  hourly  lay  upon  their  desks  reports  gathered  mi- 
nutely through  a  network  of  secret  channels,  covering  the 
conditions  of  Europe,  and  the  efforts  of  bankrupt  govern- 
ments to  re-establish  their  countries. 

Beyond  the  thought  of  that  speech  to  be  delivered  to- 


Norman  Angell,  "The  Fruits  of  Victory,"  page  324. 


254  THE  REPARATIONS  DILEMMA 

morrow,  with  which  they  must  satisfy  their  turbulent  con- 
stituents, did  either  of  them  contemplate  the  possibility  of 
additional  changes  in  the  map  of  Europe  which  would  fur- 
ther disrupt  the  economic  system  and  consequently  take  the 
power  to  earn  their  daily  bread  from  great  masses  of  popu- 
lation? What  plan  formed  itself  in  the  minds  of  these  mas- 
ters of  the  destiny  of  millions  of  people  in  central  and 
eastern  Europe?  What  motives  of  policy  reaching  into  the 
future  were  there  which  they  did  not,  could  not,  dared  not, 
tell  to  their  clamoring  parliaments — real  motives  which 
would  decide  their  action?  Did  they  fear  the  divergent 
interests  of  Britain  and  France,  and  therefore  plan  to  ob- 
scure the  reparations  issue?  For,  if  it  became  clear  that 
Germany  could  not  pay,  would  not  the  swelling  tide  of  public 
wrath  give  power  to  that  party  in  France  which  desired 
German  disintegration  ?  Did  they  not  conceal  their  dilemma 
from  the  public  through  fear  that  the  political  events  in 
each  of  their  countries  would  strain  the  Entente  to  the 
breaking  point?  And  are  they  not  juggling  with  the  repara- 
tion problem  in  order  to  give  public  opinion  time  to  sub- 
side and  reach  something  like  "normalcy"? 

It  is  extremely  difficult  to  analyze  the  political  motives 
of  those  who  are  now  directing  the  destinies  of  Europe. 
And  even  if  this  could  be  done,  it  would  not  be  safe  to  draw 
therefrom  definite  conclusions  about  the  future.  At  best 
politics  is  not  an  exact  science.  In  the  ever-changing 
kaleidoscope  of  present  world  events,  shifting  public 
opinion,  and  the  rise  and  fall  of  parties  through  Machia- 
vellian combinations,  screened  from  the  public  eye,  form 
the  rapidly  moving  film  of  the  national  political  drama. 
Men,  motives,  plans,  appear  in  the  calcium  glare  only  to 
disappear  into  the  void.  What  is  true  today  vanishes,  be- 
fore we  grasp  it,  into  the  mists  of  yesterday.  All  that  can 
be  attempted  is  to  estimate  the  trend  of  national  political 


POLITICAL  FACTORS  IN  SITUATION  255 

movements,  and,  in  the  large,  the  direction  in  which  these 
movements  are  tending.  Any  attempt  to  formulate  inter- 
national policy — and  every  nation  must  have  its  inter- 
national policy — must  be  based  upon  the  best  interpretation 
it  is  possible  to  make. 

Public  Sentiment 

Undoubtedly,  the  confusion  which  had  prevailed  from  the 
beginning  concerning  the  exigencies  of  reparations  payments 
was  gradually  clearing  in  the  minds  of  European  statesmen 
with  the  concrete  development  of  the  problem.  But  if  they 
had  come  to  understand  more  clearly  the  reparations 
dilemma,  Lloyd  George  and  Briand  were  not  on  that  ac- 
count much  nearer  its  solution.  They  both  were  faced 
(more  especially  Briand)  with  a  resolute  opposition  which 
was  ready  to  take  every  advantage  of  each  concession  exist- 
ing governments  might  make  to  reach  a  real  solution  of 
reparations.  Behind  the  opposition  was  the  general  public 
determination  that  Germany  should  be  made  to  pay.  For 
this  state  of  public  sentiment  the  French  and  British  govern- 
ments were  in  a  large  measure  responsible.  Just  prior  to 
the  Peace  Conference,  M.  Klotz,  the  French  Minister  of 
Finance  under  Clemenceau,  had  declared  uncompromisingly 
in  favor  of  making  Germany  pay  the  whole  cost  of  the  war. 
Lloyd  George  had  scarcely  been  more  discreet.  Soon  after 
the  Armistice  the  elections  took  place  in  Great  Britain. 
There  was  need  of  a  campaign  cry.  In  spite  of  a  hard  and 
fast  agreement  between  Allied  executives  and  the  German 
government  that  the  measure  of  German  payments  was  to 
be  merely  the  damage  done  by  German  acts  of  war  to  the 
civilian  population,  the  campaign  cry  that  Germany  should 
be  made  to  pay  the  whole  cost  of  the  war,  to  the  uttermost 
farthing,  was  adopted  by  the  Lloyd  George  government. 
The  great  mass  of  the  people  confronted  with  heavy  taxa- 


256  THE  REPARATIONS  DILEMMA 

tion  was  therefore  given  direct  promises  that  they  should 
be  reHeved  of  this  burden  through  the  supposedly  simple 
process  of  compelling  Germany  to  disgorge. 

In  the  Peace  Conference,  as  we  have  already  seen  in  the 
chapter  on  the  history  of  reparations,  the  Reparations  Com- 
mission (the  President  of  which  was  M.  Klotz)  found  that 
of  necessity  the  reparations  would  have  to  be  confined  to  the 
direct  damage  wrought  by  Germany  during  the  war,  plus 
pensions.  The  idea  of  compelling  Germany  to  pay  the  full 
cost  of  the  war  was  abandoned  as  impossible.  Thus  the 
Treaty  pared  down  a  portion  of  the  promises  made  by  the 
French  and  British  governments  to  their  constituents.  This 
was  followed  in  each  country  by  steadily  mounting  taxa- 
tion, continuing  budget  deficits,  and  pyramiding  debts, 
which  gave  the  opposition  the  strongest  grounds  on  which 
to  attack  the  government  for  non-fulfilment  of  promised 
reparations  payments. 

Political  Alignment  in  France 

We  have  been  speaking  of  the  opposition  to  the  French 
official  policy  of  adapting  demands  to  German  conditions. 
What  groups,  what  interests,  compose  this  opposition? 
First,  there  is  the  great  mass  of  people  who,  because  of  mis- 
leading propaganda,  perennially  blow  hot  and  cold  on  the 
subject  of  reparations.  They  want  Germany  to  pay  in  full, 
in  order  to  relieve  French  taxation  burdens  and  provide  pen- 
sion money ;  but  at  the  same  time  they  wish  to  see  Germany 
rendered  impotent  as  a  military  industrial  power,  to  the  end 
that  future  peace  and  security  may  be  vouchsafed  to  France. 
So  long  as  the  truth  about  reparations  is  not  made  clear  to 
these  people,  they  alternately  hope  and  fear  that  Germany 
will  prove  her  capacity  to  pay.  They  do  not  see  the  pay- 
ment-in-goods  dilemma;  but  they  realize  that  a  paying,  and 
therefore   a  prosperous   Germany   would   prove   a    future 


POLITICAL  FACTORS  IN  SITUATION  257 

menace  to  France;  hence  their  fear.  Now  the  moment  it 
appears  that  Germany  cannot,  or  will  not  pay,  or  that  the 
Allies  themselves  will  not  permit  Germany  to  pay,  these 
people,  if  left  in  the  dark,  will  thenceforth  blow  only  hot, 
and  demand  the  crippling  of  Germany. 

Secondly,  there  is  a  group  which  bases  its  policy  on  old 
traditions  of  military  diplomacy.  It  comprises  the  military 
party  and  the  royalists,  who  hark  back  to  the  halcyon  days 
of  French  supremacy  in  Europe  under  the  kings.  It  also 
includes  the  chauvinists  in  all  parties  and  certain  powerful 
business  interests.  To  this  political  bloc,  which  believes 
that  little  is  to  be  gotten  out  of  Germany  because  of  her  tra- 
ditional bad  faith,  the  reparations  issue  has  been  only  a 
means  to  an  end.  They  use  this  issue  as  a  means  of  bring- 
ing on  a  crisis  in  which  they  can  secure  the  support  of  the 
masses  for  destroying  the  Treaty  of  Versailles,  which  in  their 
opinion  establishes  a  status  leading  inevitably  to  German  re- 
venge. They  will  give  their  support  to  any  policy  which  may 
prevent  the  recovery  of  German  industrial  and  military  power. 

French  Chauvinists 

There  is  little  doubt  that  M.  Briand  is  no  partisan  of 
further  French  military  adventures  in  Germany.  But  the 
recalcitrancy  of  Germany,  combined  with  the.  failure  of  the 
Reparations  Commission  to  hand  over  any  cash  to  lighten 
the  French  budget  situation,  certainly  strengthened  the 
hands  of  the  chauvinist  party  desiring  the  ultimate  dismem- 
berment of  Germany.  The  German  refusal  to  accept  the 
Paris  proposals  of  the  Allies,  or  even  to  suggest  a  plan  that 
would  seem  to  give  satisfaction  to  the  Allied  demands, 
seemed  to  force  the  Premier's  hand  to  a  drastic  plan  of 
action.  M.  Briand  had  to  give  leadership  to  French  public 
opinion,  which  cried  out  for  something  to  be  done  to  bring 
the  recalcitrant  Germans  to  terms. 


258  THE  REPARATIONS  DILEMMA 

In  an  interview  with  American  correspondents,  M. 
Briand  gave  as  the  reason  for  France's  proposed  occupa- 
tion of  the  Ruhr,  the  military  protection  of  France.  "Ger- 
many has  not  disarmed  according  to  the  terms  of  the  Treaty. 
The  Franco-German  frontier  is  only  a  thin  line,  which  our 
experts  consider  insecure." 

This  statement  does  not  agree  with  the  public  declara- 
tion of  the  Allied  Disarmament  Commission,  which  in  1920 
stated  that  the  present  armament  of  Germany  was  not  a 
danger  to  France,  but  rather  increased  the  danger  of  dis- 
turbances in  Germany.  The  statement  also  ignores  the 
military  occupation  of  Rhineland  with  bridgeheads  on  the 
Rhine,  which  occupation,  by  the  terms  of  the  Treaty,  will 
last  at  least  fifteen  years.  France  does  not  rely,  therefore, 
on  her  "thin  frontier  line"  as  a  military  protection. 

M.  Briand  is  also  quoted  as  saying:  "The  occupation  of 
this  territory  will  also  prove  advantageous  from  a  financial 
viewpoint.  It  will  also  give  us  the  center  of  the  German 
manufacturing  district,  as  well  as  the  heart  of  the  munitions 
industry." 

There  could  be  no  financial  advantage  in  the  temporary 
occupation  of  the  Ruhr ;  on  the  contrary,  as  Briand  has  him- 
self at  other  times  admitted,  it  would  only  increase  the 
French  fiscal  burden.  Even  the  possession  of  the  heart  of 
the  munitions  industry  could  have  a  military  value  only  if 
such  occupation  were  made  permanent.  The  Premier  here 
appears  to  be  giving  support  to  the  militarist  party;  but  in 
the  light  of  other  expressed  views,  one  may  doubt  whether 
M.  Briand  has  any  intention  of  following  this  suggestion 
to  its  logical  conclusion. 

Uncertain  Tenure  of  French  Premiers 

Political  parties  in  France  are  as  shifting  as  the  people 
are  versatile.    Originally  a  Socialist,  M.  Briand  now  belongs 


POLITICAL  FACTORS  IN  SITUATION  259 

to  no  party.  He  has  himself  jokingly  stated  that  he  is  a 
renegade  of  all  parties.  He  has  in  recent  years,  however, 
been  moving  steadily  towards  the  right.  There  are  many 
parties  in  the  Chamber  of  Deputies,  from  the  left  with  the 
Socialists,  through  the  center  with  the  Radical  Socialists 
(the  latter  being  far  from  radical  and  not  by  any  means 
socialistic),  to  the  Clericals  on  the  right.  It  cannot  be  said 
that  there  is  any  distinct  alignment  of  parties  on  the  ques- 
tions involved  in  reparations  and  German  dismemberment; 
but  in  a  general  way  the  extreme  right  has  been  in  favor  of 
the  most  drastic  action  against  Germany,  while  the  left  has 
favored  closer  relations  with  Germany  and  leniency  in  the 
execution  of  Treaty  terms.  Briand  holds  his  power,  as  do 
nearly  all  French  premiers,  through  political  trading  among 
the  different  parties.  Permanency,  however,  is  uncertain, 
and,  holding  office  through  such  combinations,  the  Cabinet 
may  be  swept  aside  by  any  wave  of  popular  opinion  which 
reinforces  the  opposition. 

It  is  difficult  for  Americans,  with  only  two  great  parties 
and  without  the  European  parliamentary  form  of  govern- 
ment, to  imagine  how  uncertain  and  fragile  that  tenor  of 
office  is  which  requires  the  support  of  many  factions  and 
combinations  of  parties  and  individuals.  European  premiers 
have  to  possess  extreme  political  sagacity  and  capacity  to 
turn  and  twist  in  the  parliamentary  game  in  order  to  obtain 
and  hold  power.  For  this  reason  under  the  temper  of  the 
masses  today  the  premiers  are  more  noted  for  their  elo- 
quence and  agility  than  for  far-seeing  statesmanship.  Such 
was  the  uncertain  condition  of  the  French  Cabinet  when 
the  crisis  of  last  spring  occurred. 

It  is  very  generally  thought  that  the  threat  then  made 
to  seize  the  Ruhr  and  the  actual  occupation  of  the  Rhine 
ports  were  only  measures  to  call  the  German  bluff  and  bring 
Germany  to  her  senses  concerning  her  reparations  obliga- 


26o  THE  REPARATIONS  DILEMMA 

tions.  As  a  matter  of  fact  this  explanation  is  only  a  super- 
ficial one.  The  agitation  to  occupy  the  Ruhr,  of  which  for 
the  time  being  Briand  was  the  mouthpiece  (apparently  a 
somewhat  unwilling  mouthpiece),  represents  a  political 
movement  of  a  fundamental  character  in  European  politics. 
It  is  a  movement,  moreover,  which  did  not  exhaust  itself 
in  the  French  threat  to  occupy  the  Ruhr  last  spring.  It  is 
likely  to  reappear  again  in  more  or  less  the  same  way  when- 
ever Germany  fails  to  meet  payments  or  to  fulfil  the  terms 
of  the  Treaty  of  Versailles. 

American  Withdrawal 

What,  then,  is  this  situation  which  the  mass  of  the 
French  people  believe  confronts  them  on  the  continent  of 
Europe?  What  are  the  political  forces  at  work  in  which 
the  French  have  seen  the  jeopardy  of  their  own  safety  in 
the  near  and  in  the  far  future?  A  study  of  the  French  po- 
litical outlook  is  important  for  the  light  it  throws  upon  the 
whole  European  problem,  and  because  there  is  much  in  this 
point  of  view  which  is  justified  by  historical  experience  and 
by  the  present  trend  of  political  events. 

In  the  first  place,  there  has  always  been  the  all-important 
question  of  America's  attitude  in  European  affairs.  During 
the  political  campaign  of  1920  the  position  of  the  Republi- 
can party  was  so  ambiguous  that  France  was  naturally  at 
sea  as  to  the  attitude  of  the  American  government  in  the 
probable  event  of  a  change  in  administration.  President 
Harding's  inaugural  address  was  therefore  awaited  with 
eager  interest.  It  may  be  recalled  that  it  came  at  the  very 
time  of  the  London  conference  on  reparations,  at  the  end  of 
which  the  ultimatum  was  served  upon  Germany. 

It  may  not  be  without  significance,  moreover,  that  the 
policy  developed  by  the  Allies  for  the  further  occupation  of 
German  territory  in  May  last,  when  the  German  govern- 


POLITICAL  FACTORS  IN  SITUATION  26l 

ment  refused  to  accept  the  ultimatum,  was  adopted  shortly 
after  the  British  ambassador  to  the  United  States  had  re- 
turned to  Europe.  He  must  have  carried  with  him  the  in- 
formation that  the  United  States  would  probably  not  be- 
com_e  a  party  with  Great  Britain  to  the  Treaty  guaranteeing 
France  against  future  German  aggression  in  accordance 
with  the  agreement  reached  at  the  time  of  the  Peace  Con- 
ference. He  must  also  have  informed  the  Allied  govern- 
ments that  the  United  States  would  probably  neither  be- 
come a  member  of  the  League  of  Nations,  nor  actively  join 
in  enforcing  the  Treaty  of  Versailles.  In  general  the  British 
ambassador  must  have  convinced  the  Allies  that  the  United 
States  government  had  no  intention  of  entering  entangling 
alliances  abroad,  or  of  participating  in  the  balance  of  power 
which  might  re-establish  itself  in  Europe.  Such  informa- 
tion undoubtedly  shifted  the  attention  of  M.  Briand  and  the 
French  people  from  the  economic  problems  which  con- 
fronted France  to  the  no  less  distressing  political  and  mili- 
tary situation  which  promised  to  develop  on  the  European 
continent. 

Without  the  active  support  of  the  United  States  in  the 
European  situation,  France  could  not  but  view  with  misgiv- 
ing the  probable  future  political  alignments  in  Europe.  The 
disruption  of  Austria-Hungary  into  small  incapable  states, 
divided  internally  and  hostile  to  one  another,  afforded  an 
unusual  opportunity  for  re-established  Germany  to  acquire 
control  over  "Mittel-Europa."  France  feels  that  German 
capacity  for  organization  would  undoubtedly  establish  with- 
in a  generation  predominant  economic  and  political  influ- 
ence in  all  central  Europe. 

France  and  Slav  Nations 

Secondly,  there  is  little  doubt  that  the  French,  relying 
on  historic  tradition,  had  placed  great  hopes  on  the  newly 


262  THE  REPARATIONS  DILEMMA 

formed  Polish  state.  As  time  passed,  however,  she  began 
to  view  with  alarm  the  weakness  of  Poland  and  the  proba- 
bility that  it  would  take  a  long  term  of  years  to  establish 
there  a  stable  self-dependent  state  and  ally.  The  territorial 
delimitations  of  the  country  made  certain  the  hostility  of 
Russia  and  Germany  to  Poland  and  almost  assured  an  alli- 
ance between  Germany  and  Russia.  Ever  since  the  revolu- 
tion, Russia  and  the  Russians  had  become  more  and  more 
alienated  from  France  and  had  shown  a  decided  tendency 
to  turn  for  support  to  Germany.  The  attitude  of  Great 
Britain  in  the  occupation  of  Constantinople,  in  the  recogni- 
tion of  the  independence  of  the  Baltic  provinces,  and  in  her 
assent  to  the  occupation  of  Vladivostok  by  the  Japanese, 
had  aroused  the  antagonism  of  Pan-Slavism  in  Jugoslavia 
and  Czechoslovakia,  to  say  nothing  of  the  anti-British  feel- 
ing among  the  intelligensia  of  inchoate  Russia.  The  old 
Slav  grievance  had  been  revived.  Great  Britain  was  pre- 
venting the  Slavs  from  reaching  outlets  to  the  sea.  It  was 
not  impossible  that  the  antagonism  to  Great  Britain  of  Pan- 
Slavism  in  a  re-established  Russia  might  be  extended  to 
France  as  an  ally  of  Great  Britain.  This  was  especially 
true,  since  France  could  no  longer  afford  the  luxury  of  buy- 
ing Russian  support  by  great  loans.  If  Germany  were  to 
recover  her  economic  stability  and  consequently  her  political 
power,  the  future  offered  indeed  a  dark  outlook.  The  prob- 
lem was  intensified  by  the  evident  difficulty,  which  increased 
as  time  went  on,  of  preventing  Austria  from  joining  Ger- 
many, and  thereby  increasing  the  population  and  power  of 
the  traditional  enemy. 

There  were  additional  reasons  why  France  must  view 
the  future  with  distrust  if  Germany  should  recover  her 
economic  and  consequently  her  political  power.  Italy,  ever 
since  the  Armistice,  had  shown  marked  leanings  towards 
Germany;  and  it  was  an  open  secret  that  only  Germany's 


POLITICAL  FACTORS  IN  SITUATION  263 

present  weakness  still  conserved  Italy  as  a  member  of  the 
Entente.  The  dismemberment  of  Austria-Hungary  had  re- 
moved the  barrier  which  before  the  war  prevented  a  genu- 
inely friendly  alliance  between  Italy  and  Germany.  France 
certainly  could  not  risk  the  possibility  of  an  alliance  between 
Germany  and  Italy,  and  perhaps  the  stronger  nations  of  the 
Balkans,  as  well  as  an  alliance  between  Germany  and  a  re- 
juvenated Russia.  She  could  not  face  the  possibility  of  a 
future  war  against  such  a  combination  with  only  Great 
Britain  as  a  certain  ally. 

The  French  Impasse 

On  the  other  hand,  if  France  should  ultimately  decide  to 
throw  in  her  lot  with  the  Slavs,  she  might  drive  Great  Bri- 
tain and  Germany  together  in  a  formidable  combination, 
particularly  if  Italy,  Bulgaria,  and  Hungary  should  be  added 
to  the  combination.  The  political  future  for  France  was 
at  best  shrouded  in  mystery,  owing  to  the  chaos  in  Russia. 
Would  that  great  country  come  back  as  a  unit  and  take  her 
place  in  the  old  council  of  nations,  or  would  she  divide  into 
more  or  less  hostile  states  which  would  further  complicate 
the  balance  of  power?  Safety  evidently  lay  in  keeping  Ger- 
many down,  at  least  until  the  political  atmosphere  had 
cleared. 

America  alone  could  furnish  a  guarantee  to  France 
against  future  German  aggression.  But  America  now  re- 
fused to  enter  an  alliance  with  England  and  France  to 
guarantee  the  latter  against  a  possible  German  attack.  This 
refusal  seemed  full  of  sinister  portent  to  the  French.  In 
Europe  military  alliances  are  regarded  as  the  very  breath 
of  political  life,  almost  a  necessity  of  national  existence. 
Therefore,  our  refusal  to  join  such  an  alliance  with  our 
former  friends  and  companions  in  arms  must  have  indicated 
to  the  French  that  they  could  no  longer  count  on  us.    They 


264  THE  REPARATIONS  DILEMMA 

could  not  understand  friendship  on  the  basis  of  splendid 
isolation.  The  dislike  of  military  alliances  seemed  to  them 
only  a  kind  of  pretence.  Military  aid  in  the  hour  of  need 
was  from  the  French  point  of  view  the  only  basis  of  friend- 
ship. 

Even  if  Russia  did  not  recover  for  half  a  century,  indi- 
cations were  plentiful  enough  that  Germany  with  her  busi- 
ness organization  would  absorb  the  markets — such  as  they 
were — of  the  descendent  countries  of  Austria-Hungary. 
Already  Germany  had  a  practical  monopoly  of  Polish  ex- 
ports in  1920,  as  shown  by  the  report  of  the  Polish  govern- 
ment. This  could  only  mean  the  strengthening  of  Germany 
and  her  ability  to  resist  the  permanent  enforcement  of  the 
Treaty  of  Versailles,  and  the  consequent  growing  danger, 
as  each  decade  passed,  of  German  revenge.  In  the  event  of 
a  new  war,  France  could  no  longer  count  on  Russia  to  stem 
the  tide  of  a  German  onslaught,  as  in  the  Muscovite  counter- 
attack in  East  Prussia  when  the  battle  of  the  Marne  was 
raging.  Even  if  Russia  remained  in  chaos,  France,  with  her 
lesser  population  and  her  weak  allies  in  the  East,  could  not 
resist  the  power  of  a  re-established  Germany. 

As  the  negotiations  following  the  peace  brought  more 
and  more  to  the  foreground  the  divergence  of  the  political 
aims  of  France  and  Great  Britain,  the  peril  of  the  immediate 
future  seemed  imminent.  Could  France  count  permanently 
on  the  British  alliance  ?  It  even  appeared  as  if  in  time  she 
must  choose  between  her  friendship  with  the  southern  Slavs 
and  her  entente  with  Britain.  The  divergence  of  aims  be- 
tween Britain  and  France  was  becoming  each  day  more  evi- 
dent. British  economic  interests  were  clamoring  for  the 
markets  of  a  re-established  Germany,  while  political  France 
was  seeking  safety  in  political  and  economic  readjustments 
in  middle  Europe.  Such  readjustments  would  mean  per- 
manently weakened  and  impoverished  countries. 


POLITICAL  FACTORS  IN  SITUATION  265 

Policy  of  Dismembering  Germany 

In  the  national  peril  that  was  thus  foreshadowed,  it  is 
not  surprising  that  there  should  be  in  the  consciousness  of 
every  Frenchman  the  ever  recurring  thought  that  German 
recovery  must  be  prevented,  that  Germany  must  be  reduced 
to  a  position  where  she  will  be  forever  powerless  to  attack 
France.  This  result  could  be  accomplished  in  two  ways: 
the  one,  territorial;  the  other,  economic.  If  Germany  were 
divided  into  several  states,  whose  political  interest  were 
sufficiently  divergent,  France  would  be  safe.  Or,  on  the 
other  hand,  by  taking  from  Germany  her  iron  and  coal 
deposits,  France  would  strip  the  iron  gauntlet  from  the 
Teutonic  fist  and  render  the  German  nation  forever 
impotent. 

Such  plans  were  not  new  to  French  statesmanship.  From 
the  beginning  of  the  war,  articles  and  pamphlets  were  pub- 
lished in  France  advocating  the  dismemberment  of  the  Ger- 
man Empire.  In  1917 — shortly  before  the  Russian  Revolu- 
tion— notes  were  exchanged  between  the  Russian  and 
French  governments.  These  notes  constituted  an  embryo 
agreement,  whereby  France  was  to  allow  Russia  to  draw  her 
own  frontiers  on  the  west,  that  is  to  say,  to  annex  the  whole 
of  Poland  and,  if  so  desired,  the  coal  fields  of  upper  Silesia. 
On  the  other  hand,  Russia  agreed  that  France,  besides  re- 
covering Alsace-Lorraine  and  annexing  the  Saar  Basin, 
should  be  allowed  to  establish  an  independent  buffer  state  in 
Rhineland  on  the  west  bank  of  the  Rhine.  French  public 
men  have  consistently  called  attention  to  the  fact  that  when- 
ever in  history  Germany  has  been  divided  into  small  states, 
these  states  have  quarreled  among  themselves  and  left  France 
unmolested.  It  is  frequently  stated  in  France  that  the  divi- 
sion of  Germany  into  a  south  German  state.  Catholic  and 
reactionary,  and  a  north  German  state,  Protestant  and  radi- 
cal, would  assure  France  of  that  much  needed  rest  and 


266  THE  REPARATIONS  DILEMMA 

security  which  would  enable  her  to  disband  her  armies  and 
apply  all  her  strength  to  economic  rehabilitation. 

In  the  words  of  a  leading  French  editorial  writer,  who  is 
considered  an  interpreter  of  the  views  of  a  section  of  the 
French  foreign  office  and  of  the  royalist  party :  "In  the  past 
it  has  only  been  when  Germany  has  been  divided  into  small 
states  that  she  has  left  France  alone.  The  Treaty  of  Ver- 
sailles is  the  worst  possible,  since  it  ultimately  exposes 
France  to  German  attack.  The  sooner  we  come  to  a  break 
with  Germany  on  the  execution  of  that  treaty,  the  better. 
And  let  it  come  before  Germany  has  recovered  too  much." 

Separatist  Issue 

In  pursuance  of  this  policy,  the  French  administration 
in  the  Rhenish  area  of  occupation  encouraged  the  separatist 
movement  among  the  German  people.  This  movement  for 
an  independent  Rhenish  state  showed  some  indications  of 
success  during  the  Peace  Conference,  and  might  have  been 
carried  through,  had  it  not  been  for  the  strenuous  opposi- 
tion of  the  American  and  British  governments.  Quite  con- 
trary to  diplomatic  precedent,  France  also  sent  a  French 
minister  to  the  Bavarian  government,  with  a  view  to  stimu- 
lating the  separatist  movement  between  north  and  south 
Germany.  But  here  again,  France  was  met  by  British  and 
American  opposition.  There  was,  however,  another  ele- 
ment more  potent  than  the  opposition  of  her  two  allies, 
which  interfered  with  the  desire  of  France  to  see  Germany 
divided  into  separate  states.  Four  years  of  terrible  war  and 
the  bitter  terms  of  the  Treaty  of  Versailles  had  consolidated 
further  the  German  people,  and  there  now  seemed  little  hope 
of  procuring  a  lasting  division,  which  found  no  support  in 
the  heart  or  desire  of  the  masses. 

This  separatist  issue,  in  fact,  came  up  in  connection  with 
the  enforcement  of  the  terms  of  the  Treaty  of  Versailles. 


POLITICAL  FACTORS  IN  SITUATION  267 

Germany  was  to  reduce  her  army  to  100,000  men.  During 
the  year  1920,  while  the  army  and  armament  were  reduced 
to  a  point  where  the  head  of  the  French  Disarmament  Com- 
mission said  that  Germany  had  ceased  to  be  a  mihtary  dan- 
ger to  France,  still  she  had  not  yet  literally  complied  with  the 
disarmament  terms  of  the  Treaty  of  Versailles.  Spurred 
on  by  the  disorders  incident  to  the  radical  revolution 
in  Bavaria,  the  Bavarians  formed  among  the  bourgeois 
class  a  home  defense  guard  intended  to  protect  them  against 
the  possibility  of  future  radical  upheaval.  The  Allies,  de- 
claring that  this  home  guard  was  really  intended  to  keep 
alive  the  German  military  organization,  insisted  on  the  literal 
fulfilment  of  the  disarmament  clauses  of  the  Treaty  of  Ver- 
sailles. They  unwaveringly  demanded  the  disarmament  of 
the  home  protection  guard;  and  they  finally  compelled  the 
Berlin  central  government  to  take  radical  action  directed 
against  the  Bavarian  government  to  secure  this  disarma- 
ment. For  a  period  the  issue  seemed  to  threaten  a  rupture 
between  the  north  and  south  of  Germany.  Bavarian  public 
men  declared  that  they  would  secede  from  north  Germany 
rather  than  disarm.  This  crisis,  however,  soon  passed,  and 
when  the  real  test  came,  the  Bavarian  Prime  Minister  stated 
publicly  that  the  unity  of  Germany  was  paramount  and  that 
Bavarians  should  not  offer  open  resistance  to  agents  of  the 
Berlin  government,  who  had  come  to  Bavaria  to  oversee 
the  disarmament  of  the  home  defense  guard. 

French  Economic  Policy  Toward  Germany 

Thus  the  hope  of  France  of  bringing  about  a  division  of 
Germany  subsided.  It  did  not  die,  however,  for  the  French 
realize  full  well  that  there  is  a  fundamental  spiritual  antago- 
nism between  north  and  south  Germany.  There  is  hope, 
therefore,  that  this  antagonism  may  be  stimulated  sufficiently 
to  bring  results  some  day.      For  the   moment,   however, 


268  THE  REPARATIONS  DILEMMA 

French  reactionary  opinion  turned  to  the  other  alternative.  It 
was  thought  that  if  Germany  were  deprived  of  the  coal 
of  the  Ruhr  Valley  through  seizure  as  a  forfeiture  for  the 
non-payment  of  reparations,  and  if  Poland  succeeded  in 
securing  a  permanent  allotment  of  the  mines  of  upper 
Silesia,  the  fangs  of  industrial  and  military  Germany  would 
be  drawn.  It  should  be  understood,  however,  that  there 
was  not  a  united  opinion  in  France  in  favor  of  this  alterna- 
tive. 

This  plan  would  put  in  French  hands  the  power  to  dole 
out  to  German  industries  such  amounts  of  coal  and  iron  as 
might  seem  expedient.  It  would  place  the  very  means  of  ex- 
istence for  the  German  industrial  class  in  the  hands  of  the 
French  government.  In  this  way,  it  was  thought,  France 
could  at  any  time  curb  German  economic  prosperity,  should 
it  recover  sufficiently  to  become  a  menace.  She  could  even 
compel  the  German  population  to  starve  or  emigrate. 

Only  two  years  ago  the  Allied  and  Associated  Powers 
induced  their  enemies  to  disarm  under  an  Armistice  agree- 
ment that  would  render  them  powerless  to  resist  invasion. 
This  end  was  attained  by  some  very  definite  promises  made 
by  the  executives  of  Allied  and  Associated  Powers  to  these 
enemies.  The  breach  of  these  promises  in  the  treaties  after- 
wards drawn  and  in  the  post-war  action  of  the  Allies  con- 
stitute a  very  definite  factor  in  the  psychology  of  conquerors 
and  conquered  alike,  which  may  prove  the  controlling  force 
in  the  political  life  of  Europe  for  many  years  to  come.  It 
is  this  international  bad  faith  which  since  the  Treaty  of 
Peace  is  compelling  France  to  take  radical  steps  to  prevent 
Germany  from  seeking  revenge. 

French  Distrust 

This  aggressive  French  policy  is  a  logical  deduction 
from  certain  fundamental  tenets  of  the  French  faith.    First, 


POLITICAL  FACTORS  IN  SITUATION  269 

not  the  slightest  faith  is  placed  in  the  possibility  of  a  future 
friendly  and  pacific  Germany.  Second,  the  French  place 
little  trust  in  the  League  of  Nations  as  an  effective  agency 
of  international  peace.  Third,  they  believe  they  cannot 
count  upon  American  aid  in  the  event  of  a  new  German 
attack.  Fourth,  they  are  not  sure  of  the  British  alliance, 
they  profoundly  distrust  the  Italians,  and  no  other  effective 
alliance  seems  possible.  Granted  these  premises,  the  only 
logical  policy  for  France  to  pursue  appears  to  be  to  keep 
Germany  down,  now  that  she  has  her  down.  The  question, 
of  course,  remains  whether  the  premises  are  altogether 
sound.  It  may  also  be  questioned  whether  in  view  of  the 
world  economic  and  political  situation  France  can  single- 
handed  pursue  such  a  policy. 

At  the  present  moment  popular  opinion  in  France  has 
experienced  a  wave  of  reaction.  The  agreement  of  Germany 
to  fulfil  the  Allied  reparation  demands  of  May,  and  particu- 
larly the  agreement  to  furnish  7  billions  of  materials  in  five 
years  for  the  reconstruction  of  the  devastated  areas,  has 
produced  a  very  favorable  impression  on  the  masses  in 
France.  "Germany  is  endeavoring  to  pay."  What  will  be 
the  next  reaction,  when  it  appears  that  the  effort  is  beyond 
German  strength,  cannot  be  foretold.  Neither  can  it  be  esti- 
mated whether  the  pressure  which  France  and  the  other 
Allies  will  exert  on  Germany  may  go  to  the  breaking  point 
before  the  peoples  of  Allied  countries  realize  what  has 
happened.  Whether  it  be  the  breakdown  of  Germany's 
fiscal  system,  accompanied  by  stoppage  of  factories,  a  stu- 
pendous business  crisis,  and  political  and  social  upheaval, 
or  the  equally  disastrous  episode  of  a  further  military  occu- 
pation of  the  Ruhr,  makes  little  difference.  The  effects 
would  be  manifested  in  the  United  States,  as  well  as  in 
every  country  of  Europe.  There  is,  however,  hope  in  the 
fact  that  a  broader  sentiment  of  co-operation  now  appears 


270  THE  REPARATIONS  DILEMMA 

to  be  rising  in  France.  This  spirit  finds  much  reinforce- 
ment in  the  attitude  of  Great  Britain,  and  will,  it  is  to  be 
hoped,  find  support  in  the  United  States. 

It  would  seem,  however,  that  a  strong  counterforce 
against  this  spirit  of  co-operation  is  the  French  attitude  on 
armaments.  We  know  that  the  French  government  will 
oppose  reducing  her  present  army  on  the  ground  that  the 
European  situation  will  not  allow  it.  Her  military  men, 
whose  prestige  grew  enormously  during  the  war,  are  likely 
to  hold  the  whip  hand  in  this  matter.  France  naturally  sees 
in  her  dominant  army  the  only  certain  security  in  the  face 
of  the  multitude  of  political  possibilities  that  threaten  her 
national  existence.  If  the  worst  comes  to  the  worst,  she 
will  have  in  that  army — now  the  only  real  army  in  Europe, 
— the  power  with  which  to  meet  any  emergency.  At  least 
this  is  what  the  people  believe. 

There  is,  however,  a  counter  and  powerful  feeling  in 
the  nation  that,  whatever  betide,  France  cannot  afford  to 
isolate  herself  from  her  allies.  Whenever  diplomatic  nego- 
tiation reaches  a  point  where  the  dissolution  of  the  Entente 
seems  imminent,  and  France  faces  the  possibility  of  stand- 
ing alone  in  the  continental  maelstrom,  sober  second  thought 
has,  to  the  present  moment,  always  tempered  the  national 
policy.  And  in  the  future  the  attitude  of  Great  Britain  and 
America  will  undoubtedly  continue  to  have  great  weight  in 
the  councils  of  the  French  Republic. 


CHAPTER  XVIII 

POLITICAL  FACTORS  IN  THE  EUROPEAN 
SITUATION   (Continued) 

Great  Britain  and  France  After  the  War 

The  heritage  of  war  and  the  dread  of  bolshevism  in 
Europe  gave  to  Great  Britain,  after  the  Armistice,  a  con- 
servative government.  The  position  of  this  government, 
composed  as  it  was  of  a  coalition  of  many  divergent  elements 
which  inherently  tended  to  pull  apart,  was  anything  but 
secure.  The  leaders  saw  opposed  to  them  the  increasing 
power  of  the  Labor  party  which  grew  each  month  in  radical- 
ism. Among  the  members  of  the  Coalition  party  one  not  in- 
frequently heard  the  statement  that  only  the  political 
legerdemain  of  Lloyd  George  saved  Britain  from  a  Labor 
government.  Indeed,  it  was  for  this  reason  that  the  conser- 
vatists  accepted  the  leadership  of  this  former  liberal,  whom 
they  inherently  disliked  and  distrusted.  There  was  no 
agrarian  population  of  small  landowners  on  whom  they 
could  count  for  conservative  support.  Neither  could  the 
imperialist  group  in  the  government  rely  on  the  adherence 
of  the  British  middle  class,  which,  overburdened  with  taxa- 
tion, cried  out  against  the  growing  expense  of  government. 

In  order  to  conciliate  labor,  the  Coalition  government  in- 
creased and  extended  unemployment  insurance;  but  this 
added  to  the  burden  of  taxation.  It  was  to  be  expected, 
therefore,  that  the  Coalition  government  should  in  turn  seek 
to  conciliate  the  taxpayer  by  joining  France  in  demanding 
payment  from  Germany  to  the  last  sou  and  the  last  farthing. 
This  policy  naturally  found  a  ready  response  in  the  British 
middle  class;  for  Great  Britain  was  endeavoring  to  carry 

271 


272  THE  REPARATIONS  DILEMMA 

the  load  of  war  through  taxation  and  the  burden  was  prov- 
ing almost  more  than  she  could  bear.  It  is  not  surprising, 
therefore,  that  British  taxpayers  gave  undivided  support  to  a 
government  which  promised  some  measure  of  relief  through 
German  reparations. 

There  was  another  reason  why  the  conservative  govern- 
ment of  Great  Britain  was  inclined  to  follow  France  in  her 
continental  policy.  France  had  not  attempted  to  load  the 
whole  burden  of  war  on  the  shoulders  of  her  taxpayers. 
Consequently,  the  conservative  Chamber  of  Deputies,  elected 
after  the  war,  found  powerful  support  among  the  conserva- 
tive peasants  and  the  equally  contented  bourgeoisie ;  for  both 
these  classes  were  receiving  from  the  government  full  inter- 
est on  the  great  war  loans.  In  addition,  the  government  was 
expending  huge  sums  in  the  devastated  areas,  thereby  stimu- 
lating business.  The  peasants  and  the  bourgeoisie  in  their 
role  as  taxpayers  were  not,  however,  called  upon  to  defray 
more  than  half  of  these  government  expenditures.  France 
was  therefore  a  relatively  stable  and  well-balanced  country, 
in  no  way  endangered  by  radical  labor  upheavals  or  by  ex- 
periments in  social  and  economic  reorganization.  Her  influ- 
ence was  one  which  the  conservatives  of  Britain  felt  they 
must  support  in  order  that  the  situation  on  the  continent 
should  furnish  a  good  example  to  the  British  people  of  stable 
government  and  conservative  action.  Safety  lay  in  sticking 
close  to  France  and  reinforcing  the  alliance. 

Parting  of  the  Ways 

This  British  policy  was  evident  in  the  action  of  the 
government  throughout  the  inflation  period  of  191 9- 
1920.  But  when  in  the  fall  of  1920  and  in  the  winter 
of  1 92 1  the  world  business  depression  began  to  close 
British  factories,  a  new  tendency  developed  in  British 
public    opinion.      There    came    a    partial    realization    by 


POLITICAL  FACTORS  IN  SITUATION  273 

the  common-sense  business  mind  of  Britain,  that  the  world- 
wide business  collapse  made  economic  considerations  para- 
mount. International  markets  on  which  British  industries 
depended  had  disappeared.  Central  Europe  had  been  the 
best  of  these  markets.  Before  the  war  British  exporters  had 
always  complained  of  hated  German  competition  in  world 
commerce ;  but  now  it  was  becoming  more  and  more  evident 
that  if  German  industry  had  harassed  British  trade  in  some 
quarters,  it  had  nevertheless  produced  in  Germany  a  vast 
power  of  consumption  which  absorbed  huge  quantities  of 
British  manufactured  goods.  What  Britain  lost  in  other 
markets  through  German  competition  she  more  than  made 
up  by  selling  goods  direct  to  prosperous  Germany.  ^  The 
war  had  not  only  destroyed  this  market,  but  it  had  also 
eliminated  the  markets  of  the  other  countries  of  central  and 
eastern  Europe.  This,  however,  was  not  all;  the  markets  of 
South  America,  China,  and  Japan  had  succumbed  to  the 
world-wide  business  depression.  These  circumstances  forced 
home  the  realization  of  the  interdependence  of  international 
trade.  The  only  thing  that  would  save  the  industries  of 
Britain — and  save  Britain — was  the  re-establishment  of  in- 
ternational trade.  For  this  purpose  some  measure  of 
rehabilitation  was  necessary  in  Germany,  which,  after  Great 
Britain,  was  the  great  director  and  stimulator  of  world 
commerce. 

Thus  slowly  but  surely  Britain  and  France  were  coming 
to  the  parting  of  the  ways.  To  France  the  pre-eminent 
consideration  was  the  danger  of  German  revenge.  Britain 
would  perhaps  go  far  to  help  collect  reparations,  for  she 
still  vaguely  expected  to  get  some  fiscal  relief  from  this 
source;  but  she  would  not  join  in  using  the  reparations  issue 
to  further  German  disintegration,  nor  would  she  support 


'  See  also  page  142. 


274  THE  REPARATIONS  DILEMMA 

any  policy  which  had  for  its  aim  the  dismemberment  of  the 
German  Empire,  and  therefore,  the  complete  breakdown  of 
the  European  industrial  system.  Nevertheless,  it  was  not  the 
desire  of  the  British  government  to  come  to  the  breaking 
point  with  France.  The  weakened  condition  of  her  empire 
would  not  permit  of  such  a  policy,  and  there  was  still  a 
strong  feeling  in  Britain  that  the  Allies  ought  to  stand  to- 
gether. 

Threatened  Occupation  of  the  Ruhr  Basin 

In  the  spring  of  192 1  the  uncompromising  resistance  of 
the  Germans  to  the  reparation  demands  of  the  Allies,  rein- 
forced by  the  general  confusion  which  prevailed  concern- 
ing what  kind  of  reparation  payments  were  possible,  seemed 
to  make  it  imperative  for  Great  Britain  and  France  to  stand 
undivided  in  forcing  from  Germany  a  recognition  of  her 
debt  to  the  Allies.  It  was  for  this  reason  that  Lloyd  George 
himself  signed  the  Allied  ultimatum  of  March.  It  is  note- 
worthy that  by  so  doing  Great  Britain  was  able  to  modify 
France's  plan  for  further  German  occupation.  The  French 
government  at  that  time  undoubtedly  had  determined  to 
extend  Allied  military  occupation  over  the  Ruhr  coal  and 
industrial  regions. 

To  understand  the  significance  of  this  proposed  action 
one  must  realize  that  the  so-called  basin  of  the  Ruhr  com- 
prises a  territory  about  thirty  miles  long  and  twenty  miles 
broad.  Over  the  breadth  and  width  of  this  area  stretches 
an  almost  continuous  city  of  factories  and  mines.  It  is  un- 
doubtedly the  most  intensively  developed  manufacturing  and 
mining  district  in  the  world.  It  is  well  called  the  heart  of 
German  industry  and  German  economic  life. 

Leading  German  business  financiers  and  bankers  assert, 
and  we  see  no  reason  to  doubt  this  assertion,  that  the  occu- 
pation of  the  Ruhr  by  a  foreign  military  force,  with  all 


POLITICAL  FACTORS  IN  SITUATION  275 

the  inhibitions  and  prohibitions  that  such  military  occupation 
impHes,  would  practically  stop  the  flow  of  German  indus- 
trial life. 

Some  of  these  financiers,  among  the  most  powerful  in 
Germany,  have  gone  so  far  as  to  assert  that  in  case  such 
an  occupation  occurs  they  will  cast  their  lot  with  Bolshevik 
Russia.  Whether  this  declaration  is  an  idle  threat  cannot 
now  be  determined,  and  it  is  immaterial  to  this  discussion. 
The  important  consideration  is  that  people  of  various  na- 
tionalities who  have  been  studying  the  German  situation  at 
close  quarters  affirm  that  the  occupation  of  the  Ruhr  could 
precipitate  a  political  and  economic  crisis  in  Germany  which 
might  well  lead  in  the  north  to  social  upheaval  and  in  the 
south  to  secession. 

Undoubtedly  in  the  mind  of  the  British  government  the 
military  occupation  of  the  Ruhr  was  not  to  be  thought  of. 
As  a  compromise,  Britain  consented  to  co-operate  with 
France  in  taking  military  possession  of  the  ports  of  Diissel- 
dorf ,  Duisburg,  and  Ruhrort  on  the  right  bank  of  the  Rhine. 
Thus  by  co-operating  with  France,  Britain  sought  to  restrain 
the  latter's  militarist  tendencies. 

British  Anti-Slav  Policy 

However  fraught  with  danger  the  disagreement  of  the 
economic  policy  of  Britain  with  the  French  military  policy 
may  be,  there  is  another  important  principle  of  British  for- 
eign policy  which  has  led  to  even  more  serious  disagree- 
ment between  the  French  and  British  governments  over  the 
settlement  of  German  problems.  This  tenet,  held  by  the 
British  foreign  office  and  exemplified  by  the  attitude  of 
Great  Britain  towards  Poland  on  the  question  of  the  corri- 
dor to  the  sea  and  the  free  city  of  Danzig,  finds  more  recent 
expression  in  the  French-British  disagreement  over  the 
plebiscite  decision  in  upper  Silesia.    While  upper  Silesia  is 


276  THE  REPARATIONS  DILEMMA 

of  secondary  industrial  importance  to  the  Ruhr,  neverthe- 
less by  means  of  the  industrial  organization  of  upper  Silesia 
Germany  has  dominated  business  and  commercial  develop- 
ment throughout  the  rest  of  central  and  eastern  Europe. 
For  Great  Britain,  therefore,  it  was  important,  if  Germany 
was  to  resume  her  function  as  business  director  and  organ- 
izer of  central  and  eastern  Europe,  that  upper  Silesia  should 
be  conserved  to  her  practically  intact. 

As  we  have  seen,  however,  the  French  were  of  another 
mind.  They  wished  to  make  of  Poland  a  great  and  power- 
ful state,  that  could  stand  as  a  buffer  between  Germany  and 
Russia.  In  such  a  state  the  coal  fields  and  resulting  indus- 
tries of  upper  Silesia  would  play  an  important  part.  France, 
therefore,  threw  the  whole  weight  of  her  influence  into  the 
balance  to  obtain  for  Poland  a  major  part  of  the  mines  of 
upper  Silesia.  It  is  said  that  in  the  quarrel  that  ensued,  the 
French  obtained  an  agreement  from  the  Poles  by  which 
French  interests  would  control  60  per  cent  of  the  coal  fields 
and  industries  which  Poland  might  acquire.  On  the  other 
hand,  rumor  has  it  that  the  British  have  an  agreement  with 
the  Germans  of  upper  Silesia  that  Britain  on  her  part  should 
control  60  per  cent  of  the  industries  which  remained  in  Ger- 
man possession.  Whatever  truth  there  may  be  in  these  re- 
ports, there  is  revealed  in  the  conflict  over  upper  Silesia  a 
fundamental  antagonism  of  purpose  between  France  and 
Great  Britain. 

If  France  looks  on  Germany  as  a  hereditary  foe  and  sees 
in  the  Slav  a  protection  against  Teutonic  onslaught,  Britain 
takes  quite  the  opposite  view.  The  Slav  is  to  the  British 
mind  the  greatest  danger  to  the  British  Empire.  Since  be- 
fore the  days  of  the  Crimea,  Britain  has  consistently  op- 
posed Slav  expansion.  She  has  feared  the  Slav  pressure 
through  Persia  and  Afghanistan  to  India;  she  has  feared 
and  opposed  the  Slav  expansion  to  Constantinople  and  the 


POLITICAL  FACTORS  IN  SITUATION  277 

Mediterranean  as  a  threat  against  the  Suez  Canal  and  her 
dominion  in  Egypt.  More  recently  she  has  feared  the  Slav 
proximity  to  her  newly  acquired  dominions  in  Mesopotamia 
and  Persia.  There  is  a  measure  of  truth  in  the  Slav  belief 
that  Britain  is  keeping  Russia  off  the  seas.  Whereas  France 
considers  German  militarism  the  fundamental  threat  to 
European  civilization,  Britain  regards  this  danger  as  now 
partly  submerged  in  the  greater  danger  of  the  Slav  awaken- 
ing. To  her  there  looms  now  more  ominously  than  in  the 
past,  threatening  her  empire  in  the  future,  the  danger  of 
"the  Slav  avalanche." 

Fear  of  a  Greater  Russia 

This  anxiety  over  Slav  expansion  is  best  exemplified  in 
the  present  attitude  of  Great  Britain  at  Constantinople. 
There  the  British  realize  that  they  can  no  longer  afford  the 
luxury  of  a  permanent  military  occupation.  Since  the  war 
they  have  tried  in  various  ways  to  secure  some  effective 
buffer  to  stand  between  the  possessions  of  the  British  Em- 
pire and  the  Slav.  At  first  they  tried  to  induce  the  United 
States  to  take  over  the  administration  and  control  of  Con- 
stantinople and  the  surrounding  district.  Next  they  en- 
deavored to  induce  the  Italians  to  assume  a  protectorship 
over  the  peoples  of  the  Caucasus.  They  distrusted  the 
French  in  this  situation  because  of  the  Pan-Slavic  sympa- 
thies of  France.  Despairing  of  inducing  any  great  power  to 
assume  the  responsibility  of  acting  as  a  buffer  between  Great 
Britain  and  Pan-Slavia,  British  statesmanship  turned  to 
Greece  and  endeavored  to  stimulate  the  Greek  ambition  for 
the  re-establishmicnt  of  ancient  Greek  Byzantium.  The  aim 
is  to  create  a  new  and  powerful  Greece  along  the  eastern 
Mediterranean  as  a  check  to  Slav  expansion  southward. 

In  the  Baltic  States,  Britain  is  the  one  great  power  which 
has  recognized  the  independence  of  Esthonia,  Litvia,  and 


278  THE  REPARATIONS  DILEMMA 

Lithuania.  These  states  were  a  part  of  Greater  Russia, 
but  inhabited  in  the  main  by  distinct  nationaHties,  who,  when 
the  revolution  came,  demanded  their  independence.  All 
the  Slavs  say  that  Great  Britain  by  the  recognition  and  aid 
given  these  states  has  been  endeavoring  to  prevent  the  re- 
establishment  of  Greater  Russia  and  to  destroy  Russian 
influence  in  the  Baltic.  Thus  it  will  be  seen  that  Great 
Britain  is  in  a  measure  assuming  the  German  point  of  view, 
that  the  great  menace  to  Europe,  as  well  as  to  the  British 
Empire,  is  the  Slav. 

In  spite  of  the  fact  that  Russia  has  always  been  a  thinly 
populated  country,  Russian  governments  since  the  days  of 
Catherine  and  Peter  the  Great  have  extended  Muscovite 
tentacles  towards  the  absorption  of  further  territory. 
Russia  has  always  reached  out  toward  Persia,  toward 
Turkish  Asia,  and  toward  Constantinople.  Russian  policy 
has  been  to  organize  the  southern  Slavs  in  the  Balkans,  and 
its  great  ambition  before  the  war  was  to  disintegrate  the 
dual  empire  of  Austria-Hungary  and  consolidate  its  Slavic 
populations  into  a  federation,  closely  affiliated  with  the 
Russian  state. 

In  spite  of  the  present  chaos  in  Russia,  Great  Britain 
notes  with  alarm  the  realization  of  the  independence  and  the 
union  of  the  southern  Slavs.  She  sees,  with  the  re-estab- 
lishment of  Russia,  an  all-powerful  Pan-Slavic  movement 
pushing  southward  and  westward,  a  greater  menace  to  the 
peace  of  western  Europe,  and  more  especially  of  the  British 
Empire,  than  were  the  Germans  themselves  in  the  fullness 
of  their  military  power. 

This  British  fear  of  Russia  has  all  along  been  accen- 
tuated by  the  unprecedented  increase  of  Slavic  population 
as  compared  with  those  of  other  nations,  and  their  tendency 
to  spread  and  infiltrate  across  the  frontiers  of  the  nations 
to  the  west.     Like  Bismarck,  the  British  fear  nothing  so 


POLITICAL  FACTORS  IN  SITUATION  279 

much  as  the  fecundity  of  the  Slav  woman.  Therefore, 
Britain  does  not  desire  to  see  Germany,  the  great  opponent 
of  Pan-Slavia,  divided  and  crushed  so  that  she  will  offer 
little  resistance  to  the  westward  movement  of  Slavic  peoples. 
It  may  be  added  in  this  connection  that  Italy  will  be 
found  by  the  side  of  Great  Britain.  Before  the  war  Italy 
feared  the  Austrian  Empire.  Today  she  fears  nothing  so 
much  as  the  encroachment  of  the  Slav.  Already  the 
southern  Slavs  threaten  to  crowd  Italy  from  the  eastern 
shores  of  the  Adriatic,  and  the  Italian  realizes,  as  well  as  does 
the  Britisher,  that  the  great  barrier  to  the  Slav  is  the  Teu- 
ton. 

British  Military  Policy 

Behind  the  British  desire  for  re-established  commerce 
and  markets,  which  leads  her  to  oppose  the  French  efforts 
to  divide  Germany,  and  behind  the  British  endeavor  to  stem 
the  tide  of  Slav  expansion,  there  is  still  another  and  deeper 
founded  tenet  of  British  national  policy.  Great  Britain  is 
close  to  the  continent  of  Europe.  Her  food  supply,  the  raw 
material  for  her  factories,  indeed  her  very  existence  as  a 
nation  and  as  an  empire,  demand  from  a  military  point  of 
view  the  control  of  the  high  seas.  She  cannot,  therefore, 
afford  to  see  any  nation  predominant  in  Europe,  or  any  com- 
bination of  nations,  that  might  threaten  her  naval  supremacy. 

We  have  seen  that  the  British  policy  toward  Germany 
since  the  war,  has  been  largely  determined  by  economic 
considerations,  and  that  this  policy  is  in  harmony  with  oppo- 
sition to  the  Slav  menace.  On  the  other  hand,  British  policy 
in  the  Baltic  and  in  the  Levant  is  very  far  removed  from 
such  plans  of  action  as  would  coincide  with  her  economic 
needs.  It  is  undoubtedly  true  that  Britain  cannot  in  her 
present  condition  afford  the  expense  of  the  continued  mili- 
tary   occupation    of     Constantinople    and    Mesopotamia. 


280  THE  REPARATIONS  DILEMMA 

Furthermore,  she  is  in  no  position  to  re-establish  the  ancient 
power  of  Byzantine  Greece.  In  addition,  she  will  find  it 
far  beyond  her  means  to  support  the  independence  of  the 
Baltic  provinces  against  the  active  interference  of  Poland 
and  Russia.  It  must  be  remembered  that  the  political  policy 
intended  to  hold  back  a  united  Slav  development  is,  in  it- 
self, a  means  of  turning  slumbering  Slav  antipathy  into 
bitter  hatred.  Such  hatred  may  in  the  future  cost  Great 
Britain  dearly. 

Britain  is  therefore  governed  by  considerations  of  mili- 
tary politics  only  to  a  less  degree  than  France.  Let  us  con- 
sider some  recent  political  events  in  Europe  to  discover,  if 
possible,  how  these  policies  of  France  and  Great  Britain 
are  working  out,  and  whether  they  promise  a  reasonable 
degree  of  success  to  each  of  these  nations  and  promote 
tranquillity  and  reconstruction  on  the  continent  of  Europe 
as  a  whole. 

French  and  British  Clash  in  Turkey 

Two  developments  since  the  war  will  suffice  for  our  pur- 
pose. We  have  seen  that  the  British  policy  requires  a  buffer 
state  at  Constantinople  and  along  the  eastern  Mediterranean 
to  protect  its  African  and  western  Asiatic  empire,  and  pre- 
serve from  danger  that  channel  of  circulation  in  the  body 
of  the  empire,  the  Suez  Canal.  For  this  purpose  she  has 
selected  Greece.  Her  plans  for  the  aggrandizement  of 
Greece,  however,  not  only  stir  the  hatred  of  the  Slavs,  but 
also  bring  her  in  direct  conflict  with  her  ally,  France.  For 
France,  if  she  can  prevent  it,  will  not  allow  Britain  to  hand 
over  Constantinople  to  the  Greeks,  because  the  Greek 
government  of  King  Constantine  represents  the  anti-French 
movement  in  the  Levant.  France  wants  a  Turkey  with  suffi- 
cient resources  to  pay  the  French  owners  of  the  Ottoman 
debt.    France  believes  that  if  any  power  has  a  right  to  in- 


POLITICAL  FACTORS  IN  SITUATION  281 

herit  Constantinople  from  Turkey  it  is  a  re-established 
Russia,  to  whom  Constantinople  was  promised  during  the 
war.  Thus  the  British  policy  in  Constantinople  is  approach- 
ing a  checkmate.  It  has  alienated  France  and  is  embittering 
potential  Slavic  enemies. 

But  the  most  immediate  and  regrettable  results  of  this 
policy  are  evidenced  in  the  continuing  chaos  in  the  Levant. 
In  the  present  Greco-Turkish  War,  Great  Britain  is  sup- 
porting Greece  with  money  and  arms,  while  France  is  known 
to  be  furnishing  both  arms  and  officers  to  the  Turks.  There 
is  authority  for  the  statement  that  among  the  Turkish  troops 
captured  by  the  Greeks  in  Asia  Minor  were  French  officers. 

A  further  efifect  of  the  British  and  French  clash  in  Tur- 
key and  the  Balkans  is  the  marked  and  continued  economic 
deterioration  of  the  whole  Levant.  The  war  between  the 
Greeks  and  the  Turks  threatens  to  become  perennial,  and  to 
prolong  indefinitely  the  cessation  of  commerce  with  the  in- 
terior of  Asia  Minor.  Constantinople  itself  is  in  a  pitiable 
plight.  The  city  is  overflowing  with  refugees — Russians, 
Armenians,  and  Greeks.  It  is  in  imminent  danger  now  of  an 
attack  by  the  Turks,  and  again  from  occupation  by  the 
Greeks.  Food  is  scarce  and  bad,  and  its  cost  all  but  prohibi- 
tive. The  filth  everywhere  is  beyond  description.  Even  that 
former  luxurious  continental  hotel  on  the  Bosporus,  the 
Para  Palace,  is  rendered  almost  uninhabitable  by  dirt  and 
vermin.  If  an  American  commerical  traveler  wishes  to  go 
from  Paris  to  Constantinople  and  return,  he  will  have  to 
pay  simply  for  vises  on  his  passport,  $160.  He  must  secure 
French,  British,  Swiss,  Austrian,  Bulgarian,  Serbian, 
Italian,  and  Greek  vises,  both  going  and  coming,  and  in 
obtaining  them  he  will  everywhere  meet  with  the  hostile  and 
dilatory  tactics  of  government  officials,  such  as  always 
exist  in  situations  where  every  traveler  is  prima  facie  under 
suspicion.     All  of  these  conditions  indicate,  and  in  turn 


282  THE  REPARATIONS  DILEMMA 

cause,  discouragement  of  trade  and  industry,  and  continued 
economic  decay. 

Failure  of  French  Pro-Slav  Policy 

The  French  military-poHtical  policy  has  not  been  more 
successful  than  has  the  British.  The  shifting  political  and 
economic  trend  in  each  country,  on  which  France  seeks  to 
rely,  has  at  critical  moments  proved  out  of  tune  with  the 
French  policy.  For  instance,  France  counted  on  the  iron 
ring  of  states  around  Germany  to  keep  the  latter  bottled  up. 
She  thought  that  for  this  purpose  she  had  cemented  suf- 
ficiently friendly  relation  with  Poland,  Czechoslovakia,  and 
Roumania. 

A  part  of  this  policy  of  strengthening  the  iron  ring 
about  Germany  was  the  plan  to  unseat  in  Russia  the  Bolshe- 
vik regime,  which  France  believed  friendly  to  Germany,  and 
to  substitute  a  government  friendly  to  herself,  thus  assuring 
a  Pan-Slav  movement  sympathetic  with  France  and  hostile 
to  Germany.  Failing  to  accomplish  this  end  herself,  France 
in  turn  gave  support  to  Kolchak,  Denikin,  and  Wrangle ;  in 
fact,  to  all  the  numerous  adventurers  who  promised  opposi- 
tion to  bolshevism.  Finally  her  military  agents  urged 
Poland  to  wage  an  offensive  against  the  Bolsheviks.  When 
the  Poles  went  beyond  the  advice  of  these  agents  in  their 
disastrous  expedition  to  Kiev,  France,  seeing  the  Bolsheviks 
threatening  at  the  gates  of  Warsaw,  had  to  come  to  the 
active  military  support  of  Poland.  She  called  for  aid  from 
Czechoslovakia  and  Roumania.  Her  political  policy  counted 
on  these  two  countries  to  support  her;  but  to  her  chagrin 
she  found  that  neither  of  them  would  undertake  an  anti- 
bolshevik  campaign.  Czechoslovakia  had  a  Socialist  govern- 
ment whose  last  desire  was  to  attack  the  Bolshevists,  or  to 
support  the  Poles  whom  they  hated.  The  Roumanians,  in 
spite  of  the  aid  France  had  given  in  reorganizing  their 


POLITICAL  FACTORS  IN  SITUATION  283 

armies  during  the  war,  had  too  much  trouble  in  keeping 
control  of  the  territory  they  had  acquired  during  the  war 
to  think  of  attacking  anyone — except  Hungary,  in  case 
opportunity  offered  and  others  would  join  her.  The  dis- 
satisfaction in  Bessarabia  made  it  most  impolitic  for 
Roumania  to  make  war  on  the  Bolshevik  government,  and 
thus  invite  the  loss  of  her  newly  acquired  province.  The 
only  power  that  offered  to  come  to  the  aid  of  France  was 
Hungary,  but  Czechoslovakia  would  not  allow  Hungarian 
troops  to  cross  her  territory.  Thus  French  military  diplo- 
macy broke  down  at  its  very  inception. 

For  the  moment  it  is  true,  Jugoslavia,  with  its  mon- 
archic government,  may  support  French  policies,  but  no  one 
can  tell  how  long  that  support  is  likely  to  last.  The  Pan- 
Slav  movement  in  that  country  and  the  deplorable  economic 
conditions  under  which  the  Serbs  are  living,  have  stirred 
among  them  a  strong  and  growing  sympathy  for  Bolshevik 
Russia.  So  serious  is  this  Serbian  movement  that  the  Ser- 
bian king  refused  for  a  time  to  return  to  Belgrade.  One 
might  multiply  instances  of  the  failures  of  the  ancient 
military  diplomacy  in  post-war  Europe;  but  the  cases  cited 
are  sufficient  for  present  purposes. 

Suggested  Balances  of  Power 

We  have  seen  in  the  preceding  pages  some  of  the  effects 
of  the  British  and  French  military  diplomatic  policy  in  the 
current  situation  in  Europe,  and  the  influence  which  these 
policies  are  having  on  the  economic  situation.  It  cannot  be 
said  that  these  policies  have  yielded  desirable  results  to  the 
nations  concerned,  or  assisted  in  a  rehabilitation  that  would 
promise  some  measure  of  peace  and  prosperity  to  Europe. 
Let  us  now  look  forward.  Is  there  any  probability  that  the 
military  policies  of  France  and  Great  Britain,  the  only 
powers  now  in  a  position  to  act  internationally,  will  yield 


284  THE  REPARATIONS  DILEMMA 

any  better  results  in  the  future  ?  For  this  purpose  it  will  be 
necessary  to  consider  what  national  alliances  in  a  new 
European  balance  of  power  are  foreshadowed  in  Europe 
today.  Although  in  the  very  uncertain  post-war  political 
situation,  few  have  ventured  to  predict  what  the  future 
balance  of  power  will  be ;  nevertheless  the  considerations  of 
future  political  alignments  are  of  preponderant  influence  on 
the  present  policies  of  all  European  governments.  Two 
possible  balances  of  power  have  been  suggested  by  students 
of  the  situation. 

The  first  and  the  one  most  believed  in  France  is  an  al- 
liance between  Germany  and  Russia,  and  that  whether  Russia 
remains  bolshevik  or  not.  To  this  alliance  would  be 
gathered  Italy,  reconciled  to  Austria  and  even  to  Jugoslavia, 
France,  therefore,  could  hope  for  an  alliance  only  with 
Hungary,  Bulgaria,  Roumania,  and  Poland.  Such  political 
affiliations  would,  of  course,  be  no  military  balance  of  power 
at  all,  without  Great  Britain  in  the  French  alliance.  Even 
with  Great  Britain  in  the  alliance,  the  probable  result  of  a 
military  struggle,  if  we  may  judge  from  the  events  of  the 
Great  War,  would  be  the  hopeless  collapse  of  the  French, 
British,  Polish,  Bulgarian,  Roumanian  group.  It  must  be 
remembered  that  Britain  cannot  at  one  and  the  same  time 
keep  up  a  big  army  and  maintain  her  supremacy  of  the  seas. 

On  the  other  hand,  a  student  of  the  political  situation 
suggests  the  following  balance  of  power :  Russia  is  to 
become  reconciled  to  Poland  and  allied  to  France.  She  will 
secure  the  support  of  Czechoslovakia  and  Jugoslavia.  In  the 
other  scale  of  the  international  balance  would  be  Germany 
allied  to  Italy,  Austria,  Hungary,  Bulgaria,  and  Roumania. 
Great  Britain  and  the  United  States  would  remain  isolated. 
This  combination  would  be  a  real  balance,  in  which  the 
superior  organizing  power  of  the  Germans  would  be  offset 
by  the  greater  population  of  the  Slavic  states. 


POLITICAL  FACTORS  IN  SITUATION  285 

The  hatred  of  Poland  for  Russia  is,  however,  as  great 
as  that  of  France  for  Germany,  and  it  is  founded  on  more 
prolonged  suffering  than  that  of  France.  It  is  difficult, 
therefore,  to  conceive  a  balance  of  power  in  Europe  founded 
on  a  reconciliation  of  Poland  and  Russia.  For  that  matter, 
the  first  hypothesis — an  alliance  of  Germany,  Russia, 
Czechoslovakia,  Jugoslavia,  Italy,  and  Austria — implies  a 
reconciliation  between  Italy  and  the  Slavs,  and  between 
Germany  and  the  Czechs,  both  of  which  events  seem  equally 
improbable. 

Real  Balance  of  Power  Improbable  in  Near  Future 

We  find  in  recent  international  developments  in  Europe 
little  indication  that  either  of  these  suggested  alliances  is 
taking  shape,  or  that  any  other  balance  of  power  is  in  the 
making.  Some  of  the  leading  manifestations  of  future 
international  relationships  in  Europe  are  deserving  of 
attention.  The  most  striking  illustration  is  the  perpetual 
disagreement  among  the  Allies  over  the  execution  of  the 
peace  treaties.  The  hostility  of  Italy  to  France  ^  and  the 
divergence  of  interest  between  France  and  Great  Britain  are 
evident  enough.  Accompanying  the  threatened  dissolution 
of  the  Entente  is  an  incipient  rapprochement  between  Italy 
and  Germany.  In  central  Europe  the  Little  Entente — 
Czechoslovakia,  Jugoslavia,  and  Roumania — is  the  first 
real  alliance  made  since  the  war.  It  is  aimed  to  prevent 
Hungary  from  receiving  the  territory  taken  from  her  by 
the  war  settlements.  It  is  at  once  apparent  that  the  re- 
entry of  a  rehabilitated  Russia  into  the  arena  of  military 
politics  in  Europe  would  up^et  this  alliance.     A  Russia 


'The  hostility  between  Italy  and  France  has  reached  such  a  point 
that  recently  a  French  mission  on  peaceful  errand  of  paying  rever- 
ence to  those  French  soldiers  who  were  killed  on  the  Italian  front  were 
mobbed  in  Italian  cities. 


286  THE  REPARATIONS  DILEMMA 

governed  by  military  diplomacy  would  seek  at  once  the 
recovery  of  Bessarabia  from  Roumania.  Both  Jugoslavia 
and  Czechoslovakia  would  doubtless  seek  close  ties  with 
Russia,  and  certainly  would  give  no  support  to  Roumania 
against  Russia.  The  hostility  of  Russia  and  Poland,  and 
the  equally  great  enmity  between  Germany  and  Poland, 
constitute  permanent  political  tendencies  bred  in  the  bone  of 
these  nations.  The  hatred  of  Germany  and  France  is,  of 
course,  also  a  permanent  factor  that  must  be  reckoned  with, 
not  to  mention  the  increasing  antagonism  of  the  Slavs  to 
Great  Britain. 

These  forces,  which  are  those  now  most  apparent  in 
Europe,  give  no  inkling  as  to  the  probable  balance  of  power 
which  will  in  the  end  evolve.  The  truth  is  that  the  most 
likely  outcome  of  the  present  political  chaos  in  Europe  is  that 
there  will  be  for  many  years  to  come  no  real  military  balance 
of  power. 

Three  Nations  Eliminated 

The  practical  bankruptcy  of  every  European  govern- 
ment will  shortly  affect  its  international  political  policy. 
Italy  is  already  feeling  the  pressure  of  the  world  economic 
crisis  to  such  a  degree  that  the  Italian  government  has  been 
obliged  to  abandon  its  military  adventures  in  Albania  and 
Asia  Minor.  Italian  imperialism  has,  in  large  measure, 
been  given  up,  at  least  for  some  years  to  come.  And  the 
Italians  say  that  it  is  better  for  them  at  present  not  to  mix 
too  ardently  in  European  political  entanglements,  since  they 
have  all  they  can  attend  to  in  re-establishing  their  own 
country,  without  meddling  in  outside  matters  which  cost 
much  and  under  present  conditions  are  fraught  with  ex- 
treme danger. 

For  a  generation  Germany  cannot  be  counted  upon 
as  an   important   factor   in   any   new   balance   of   power. 


POLITICAL  FACTORS  IN  SITUATION  287 

Germany  must  go  through  bankruptcy  in  the  not  distant 
future,  and  that  painful  process  is  likely  to  absorb  all 
her  energies.  Russia  is  equally  out  of  the  game.  Her 
recovery  must  of  necessity  be  slow.  The  once  greater 
Russia  is  a  unit  only  in  name.  Time  may  bring  a  permanent 
division  into  separate  states,  or  a  confederation  may  ulti- 
mately evolve.  But  in  the  meantime  Russia's  regrowth  to 
something  like  her  former  power  will  be  a  slow  process, 
involving  a  constantly  changing  value  as  an  ally  for  other 
powers.  For  instance,  France  is  today  seeking  to  upset 
the  Soviet  government  in  order  to  secure  a  Russia  which 
will  be  favorable  to  a  French  alliance.  Yet,  on  the  other 
hand,  most  other  European  governments,  as  well  as  the 
Russian  exiles,  now  desire  the  continuance  of  the  Soviet 
government  for  the  present  because  they  feel  that  that  gov- 
ernment is  now  the  only  force  that  can  conceivably  prevent 
complete  economic  and  social  chaos  in  that  most  unhappy  of 
lands. 

With  Italy,  Germany,  and  Russia  out  of  any  military 
international  alignment,  it  is  obvious  that  no  real  European 
balance  of  great  powers  is  possible  for  some  time  to  come. 
Meanwhile,  if  militarism  is  to  prevail  instead  of  the  politics 
of  economics,  each  nation  will  struggle  to  maintain  large 
armed  forces  in  order  to  protect  itself  against  military  un- 
certainty as  well  as  to  attain  a  fitting  position  when  the 
future  balance  of  power  is  finally  evolved.  If  a  military 
imperialist  policy  prevails  in  Europe  in  spite  of  the  poverty 
of  nations,  internal  troubles,  and  general  decadence,  and 
if  the  United  States  maintains  her  aloofness,  it  is  not  at  all 
improbable  that  another  European  war,  or  several  European 
wars,  will  be  necessary  for  the  re-establishment  of  the  bal- 
ance of  power,  for  the  reason  that  the  peace  has  left  the 
military  power  in  the  hands  of  a  small  minority  on  the 
continent. 


288  THE  REPARATIONS  DILEMMA 

Present  Examples  of  Disagreement 

The  points  of  conflict  between  French  and  British 
policies  show  themselves  in  continual  disagreements,  of 
which  the  following  are  today  examples : 

1.  The  French  have  made  a  treaty  with  the  Turkish 

nationalist  government  under  Mustafha  Kemel 
Pasha.  This  treaty  conflicts  with  British  policy 
in  the  Levant,  which  desires  Greek  supremacy. 

2.  In  the  Serbian-Albanian  conflict,  France  sides  with 

Serbia  and  Great  Britain  with  Albania :  neither 
of  them  on  grounds  of  justice  and  equity  but 
from  divergent  nationalistic  interest.  France 
inclines  to  back  the  Pan-Slav  movement  in  the 
Balkans,  while  Great  Britain  fears  it. 

3.  The  British  have  protested  against  the  Loucheur- 

Rathenau  agreement,  whereby  Germany  is  to 
pay  France  reparations  in  goods. 

4.  Finally,  Great  Britain  now  favors  giving  Germany 

a  moratorium  on  reparation  payments  for  two 
years.  This  proposal  angers  the  French  to 
bitterness. 

Coming  Predominance  of  Economic  Considerations 

Such,  then,  is  the  confused  status  of  European  politics 
in  general.  Since  the  Armistice  there  has  been  nothing  but 
drifting  in  the  counter  currents  of  military  and  economic 
needs.  There  is,  moreover,  nowhere  discernible  among  lead- 
ing nations  any  united  policy  designed  to  facilitate  the 
restoration  of  the  shattered  economic  and  social  organiza- 
tion. For  example,  the  political  policies  of  France  and 
Great  Britain  are  based  on  fundamentally  contradictory 
beliefs,  or  fears,  which  prevent  a  concerted  policy  of  recon- 
struction.    And  the  worst  of  it  is  that  they  are  based  on 


POLITICAL  FACTORS  IN  SITUATION  289 

bugbears  of  the  past.  The  British  fear  of  the  Slav  and 
the  French  fear  of  the  Teuton  were  conceived,  born,  and 
matured  when  Russia  and  Germany  were  puissant  nations 
and  not  the  impotent  remnants  of  today.  Either  the  French 
or  the  British  poHcy  may  lead  nations  to  further  destructive 
conflicts,  but  neither  can  furnish  the  basis  for  the  industrial 
reconstruction  of  Europe. 

What  are  the  real  factors  that  will  direct  the  course  of 
developments  in  Europe  in  the  next  few  years — for  good  or 
for  evil?  As  we  have  stated  in  the  previous  chapter,  the 
controlling  forces  will  be  those  which  concern  themselves 
with  the  needs  of  great  masses  of  people  for  their  daily 
bread.  More  and  more  the  present  situation  will  demon- 
strate that  without  closer  international  co-operation  these 
masses  cannot  secure  the  minimum  requirements  for  sub- 
sistence. Slowly  but  surely  economic  considerations  will 
reveal  the  folly  of  political  policies  formulated  by  elderly 
statesmen  who  are  still  looking  over  their  shoulders  for  the 
guide-posts  of  a  departed  era. 

Already  in  Great  Britain  we  find  that,  owing  to  the 
burden  of  taxation  and  the  grave  industrial  crisis,  there  is 
a  broader  realization  of  the  economic  interdependence  of  the 
world  and  of  the  consequent  need  for  international  co-opera- 
tion. In  Great  Britain  there  is  a  growing  and  ever  greater 
pressure  to  eliminate  military  expeditions  and  military 
occupations.  Under  the  pressure  of  the  taxpayer.  Parliament 
is  ever  demanding  greater  economy  of  the  government. 
Military  diplomacy  would  lead  Great  Britain  to  make  her 
occupation  of  Constantinople  a  permanent  one;  but  today 
the  British  acknowledge  that  they  cannot  afford  to  continue 
that  occupation,  and  the  government,  in  its  financial  distress, 
is,  as  we  have  seen,  urging  on  the  Greeks  in  their  war  against 
the  Turks,  in  the  hope  that  the  former  may  control  Con- 
stantinople and  Asia  Minor.     But  the  Greek  government 


290  THE  REPARATIONS  DILEMMA 

itself  is  in  no  position  to  maintain  its  authority  against  the 
Turks  by  force  of  arms;  and  if  it  strains  its  financial  re- 
sources in  an  endeavor  to  do  so,  it  will  ultimately  meet  with 
serious  domestic  difficulties. 

Likelihood  of  Ruhr  Occupation 

In  France,  on  the  other  hand,  where  the  burden  of  war 
costs  has  not  been  shouldered  by  the  taxpayers,  it  is  not  yet 
fully  realized  that  the  resources  with  which  to  carry  out  a 
policy  of  European  control  do  not  exist.  Accordingly,  the 
paramount  political  issue  in  Europe  today  is,  What  will 
France  do  when  Germany  defaults  on  her  reparations  obliga- 
tion? Will  she  rush  forward  into  new  military  adventures 
by  the  occupation  of  the  Ruhr  coal  and  industrial  region,  or 
will  she  be  governed  by  more  prudent  counsel  ?  A  multitude 
of  possible  contingencies  make  prophecy  hazardous.  The 
outcome  depends  not  only  on  economic  considerations,  but 
also  on  the  psychology  of  masses  and  leaders.  Public  opinion 
changes  rapidly;  new  governments  arise  to  substitute  new 
policies.  However,  the  important  forces  which  appear  on 
the  political  horizon  to  influence  the  French  decision  in  the 
matter  of  occupying  the  Ruhr,  are  as  follows : 

When  Germany  defaults,  French  public  opinion  will  be 
divided  into  two  camps.  On  the  one  hand,  there  will  be  a 
demand  for  some  action  to  compel  payment.  If  Germany 
cannot,  or  will  not,  pay  in  specie  or  in  commodities,  then  she 
must  pay  in  territory.  The  opposition  to  the  government, 
backed  by  powerful  groups  on  the  right  and  center  of  the 
Chamber  of  Deputies,  will  therefore  demand  drastic  military 
action,  involving  the  occupation  of  the  Ruhr  and  the  West- 
phalian  industrial  region.  That  the  representatives  of  other 
nations  who  have  been  in  touch  with  the  developments  of 
the  reparations  problem  believe  this  situation  is  bound  to 
arise,  is  proved  by  the  fact  that  some  of  them,  who  desire 


POLITICAL  FACTORS  IN  SITUATION  29I 

a  pacific  solution  of  the  reparations  problem,  have  unof- 
ficially endeavored  to  induce  the  Allied  evacuation  of 
Diisseldorf ,  Ruhrort,  and  Duisburg.  The  idea  is  that  when 
Germany  defaults  on  reparations  the  Allies  could  again 
occupy  these  cities,  and  thus  do  something  to  quiet  popular 
clamor. 

The  demand  of  the  militarist  group  in  France  for  the 
occupation  of  the  Ruhr  will  not  be  dictated  primarily  by  the 
hope  of  securing  reparations.  If  Germany  does  not  pay — 
if  France  cannot  regain  her  economic  strength  through  the 
receipt  of  German  reparations — then  the  only  alternative 
this  group  sees  is  the  permanent  crippling  of  Germany  as 
a  military  industrial  power.  That  this  demand  will  meet 
with  much  popular  support  is  apparent  from  the  analysis 
of  the  French  political  situation  made  in  the  preceding 
chapter.  There  is  in  the  background  of  almost  every 
Frenchman's  mind  the  fear  of  German  recovery  and  Ger- 
man revenge. 

On  the  other  hand,  there  will  be  a  large  body  of  French 
popular  opinion  opposed  to  further  military  action  by 
France,  because  of  the  realization  that  such  action  would 
involve  the  country  in  vast  military  expenditures  and  at  the 
same  time  would  offer  no  immediate  prospect  of  securing 
reparations  and  little  prospect  of  ultimate  economic  gain. 

What  relative  political  strength  these  divergent  points  of 
view  will  have  it  is  impossible  at  the  moment  to  foreshadow. 
Frank  H.  Simonds,  the  well-known  military  and  political 
critic,  who  is  conceded  to  be  close  to  the  French  foreign 
office,  has  stated  unqualifiedly  that  if  Germany  fails  to  pay, 
France  will  seize  the  Ruhr,  volens  nolens.  ^  No  one  can  be 
wholly  certain  of  this,  however,  because  of  the  shifting 
currents  of  public  opinion  that  prevail.     If  the  truth  about 


*  "Germany   Takes  Her  Medicine,"  American  Review   of  Reviews, 
June,  192 1. 


292  THE  REPARATIONS  DILEMMA 

reparations  dawns  slowly  on  the  French  people,  through  a 
process  of  education,  the  chances  of  avoiding  military  action 
will  of  course  be  greatly  enhanced.  But  if  the  crisis  comes 
suddenly,  with  public  opinion  unprepared,  it  is  probable  that 
the  demand  for  military  occupation  will  be  so  great  that 
whatever  the  inclination  of  the  existing  government,  it 
would  be  compelled  to  occupy  the  Ruhr,  or  give  place  to  a 
government  that  would. 

Other  Factors 

There  is  one  other  factor  which  may  effect  the  decision 
of  the  French  government  on  the  occupation  of  the  Ruhr. 
Our  view  of  the  desperate  financial  condition  of  France  is 
now  shared  by  a  large  body  of  Frenchmen.  Indeed,  there 
is  a  social  and  political  group  forming,  whose  sole  purpose 
is  to  be  ready  to  take  a  hand  whenever  the  present  fiscal 
policy  leads  to  political  upheaval  and  perhaps  social  revolu- 
tion. In  such  a  crisis  this  new  organization,  which  has 
groups  in  every  important  city  in  France,  proposes  when 
revolution  comes  to  intervene  by  force  and  prevent,  if  possi- 
ble, wholesale  destruction  of  property.  One  of  the  leaders 
of  this  movement  says  :  "Revolutionists  don't  make  revolu- 
tions; it  is  the  bourgeoisie,  when  they  are  really  aroused, 
who  do  it.  Talk  of  the  proletariat;  but  watch  these  little 
shopkeepers  when  the  government  stops  paying  interest  on 
their  government  bond  holdings.  Then  is  when  we'll  have 
real  revolution."  In  view  of  the  hopeless  condition  of 
French  government  finances,  it  is  not  impossible  that  sooner 
or  later  the  French  government  will  be  brought  face  to  face 
with  the  possibility  of  a  serious  social  upheaval.  In  such  a 
contingency  might  not  the  occupation  of  the  Ruhr,  by  direct- 
ing public  anger  against  Germany,  provide  the  necessary 
safety-valve  for  the  French  government  ? 

There  is  a  possibility,  however,  that  outside  influences 


POLITICAL  FACTORS  IN  SITUATION  293 

will  profoundly  affect  the  French  decision.  Premier  Briand 
himself  has  announced  in  the  Chamber  of  Deputies — and 
his  announcement  received  the  supporting  vote  of  that  body 
— that  France  cannot  afford  to  isolate  herself  from  her 
former  allies  and  go  it  alone.  Although  there  are  powerful 
individuals  and  groups  in  Great  Britain  who  favor  drastic 
measures  against  Germany  in  case  she  fails  to  pay  repara- 
tions, still  it  may  be  predicted  that  the  British  government, 
with  the  support  of  the  majority  of  Parliament,  will  oppose 
the  military  occupation  of  the  Ruhr. 

How  great  a  weight  such  British  opposition  will  have 
with  France  at  such  a  moment  is  difficult  to  estimate.  Much 
will  depend  on  how  far  other  political  and  economic  issues 
and  settlements  have  strained  the  alliance  between  Britain 
and  France.  Again  much  may  depend  on  the  operation  of 
the  Loucheur-Rathenau  agreement  for  the  delivery  of  Ger- 
man goods  for  the  rehabilitation  of  the  devastated  areas. 
Should  this  agreement  be  ratified  in  the  Chamber  of 
Deputies,  and  should  it  affect  adversely  French  industry, 
a  corresponding  anti-German  feeling  might  thereby  be 
aroused  in  France.  When  the  moment  of  the  final  decision 
arrives,  it  seems  probable  that  the  weight  of  American 
influence  may  turn  the  scales. 

Economic  Consequences  of  Occupation 

It  may  prove  interesting  to  inquire  what  might  happen 
if,  in  the  event  of  German  default,  France  should  elect  to 
seize  and  control  the  Westphalian  industrial  district.  There 
are  those  who  believe  that  France  would  thus  be  able  to 
collect  reparations,  notwithstanding  the  failure  to  do  so 
through  the  occupation  of  the  Rhine  cities.  There  are 
those,  however,  who  suggest  that  instead  of  endeavoring 
to  collect  reparations  through  seizing  German  customs  and 
other  revenues,  France  should  take  control  of  certain  Ger- 


294  THE  REPARATIONS  DILEMMA 

man  key  industries  and  utilize  them  so  as  to  secure  repara- 
tion payments.  This  has  been  suggested  by  numerous 
Frenchmen,  and  even  by  a  well-known  editor  in  the  United 
States,  whose  publication  has  broad  influence  on  American 
public  opinion.  In  answer  to  this  suggestion  it  must  be 
repeated  here  that  whatever  payments  are  collected  through 
a  military  occupation  must  be  in  either  gold  or  goods.  There 
is  no  gold  in  the  Ruhr  industrial  region;  and  if  the  goods 
are  collected  they  must  be  disposed  of  outside  the  country, 
either  in  competition  with  French  goods  or  with  those  of 
other  countries.  If  France  took  upon  itself  the  task  of 
operating  the  German  industries  in  the  Ruhr  district,  she 
would  be  compelled  to  market  the  goods  produced  in  that 
region  in  competition  with  the  goods  produced  by  her  own 
citizens. 

If  France  were  to  endeavor  in  a  large  way  to  reorganize 
all  of  German  industrial  life  with  a  view  to  securing  repara- 
tion payments,  it  would  be  necessary  for  her  to  balance  the 
German  budget,  stabilize  German  exchange,  and  re-establish 
German  commerce  throughout  the  world.  France  has  been 
unable  to  accomplish  these  things  within  her  own  borders; 
would  she  be  able  to  accomplish  the  task  in  a  hostile  foreign 
nation,  economically  disorganized  by  the  necessary  inhibi- 
tions and  abuses  of  a  military  occupation?  It  is  safe  to  say 
that  the  military  occupation  of  the  Ruhr  could  not  even 
pay  its  own  expenses.  It  would  only  add  to  the  burden  of 
the  French  budget.  It  may  be  recalled  in  this  connection 
that  the  first  billion  of  reparation  payments  made  by  Ger- 
many last  August  was  for  the  most  part  absorbed  by  the  cost 
of  maintaining  the  British  and  Belgian  armies  of  occupation 
on  the  Rhine,  and  that  France  has  thus  far  received  no 
financial  remuneration  for  the  1.2  billion  marks  expended 
on  the  army  of  occupation  which  she  is  maintaining  in  the 
Rhineland. 


POLITICAL  FACTORS  IN  SITUATION  295 

Destruction  of  Industrialized  Germany 

The  main  purpose  of  a  French  occupation  of  the  Ruhr, 
however,  would  not  be  economic  but  military.  If  repara- 
tions prove  a  myth,  then,  it  will  be  argued,  Germany  must 
be  broken  and  destroyed  as  a  potential  industrial  and  mili- 
tary power,  by  seizing  this  nerve  center  of  the  German  in- 
dustrial and  military  system.  Many  believe  that  Germany's 
fate  would  thus  be  sealed,  particularly  if  the  Silesian 
industrial  region  goes  to  Poland.  Stated  in  plain  but  cruel 
language,  what  is  involved  in  the  seizure  of  the  Ruhr  is  the 
destruction  of  Germany  as  an  industrial  nation  and  the  re- 
duction of  the  country  primarily  to  an  agricultural  status 
such  as  prevailed  in  the  middle  of  the  last  century,  a  reduc- 
tion which  would  involve  the  starvation  or  emigration  to — 
God  knows  where — of  some  10  or  15  millions  of  people. 
We  have  heard  this  grim  eventuality  advocated  by  men  of 
high  intelligence  and  sincerity  as  the  only  permanent  solu- 
tion of  the  European  problem. 

The  argument  in  brief  is  that  there  can  be  no  lasting 
peace  and  no  permanent  prosperity  in  Europe  so  long  as 
the  German  menace  exists.  The  German  menace  will  exist 
so  long  as  Germany  remains  an  industrial  nation.  Therefore, 
Germany  cannot  be  permitted  to  remain  industrialized. 
Granted  the  original  hypothesis,  the  logic  appears  incon- 
testable. One  must  raise  the  query,  however,  whether 
France  could  carry  through  such  a  policy  as  is  here  fore- 
shadowed. 

In  the  first  place,  it  is  seriously  to  be  doubted  whether 
France,  weakened  in  man-power  as  she  has  been  by  the  war, 
could  from  a  military  point  of  view  successfully  carry  out 
a  prolonged  occupation  of  Germany.  On  the  economic  side 
it  would  almost  certainly  prove  disastrous  to  France.  Not 
only  would  government  expenditures  be  greatly  increased; 
but  the  economic  consequences  of  the  dismantling  of  the 


296  THE  REPARATIONS  DILEMMA 

German  industrial  state  and  the  attending  social  and  political 
disorders  in  Germany  would,  as  we  have  seen  in  Chapter 
XI  on  the  unity  of  the  problem,  produce  the  most  profound 
economic  disturbance  not  only  in  France  but  throughout  the 
world.  The  almost  certain  result  would  be  an  accelerated 
disintegration  of  the  whole  European  economic  and  social 
system. 

On  the  political  side,  the  undertaking  of  such  a  policy 
by  France  would  be  practically  certain  to  alienate  her  present 
allies.  France's  great  strength  in  the  last  half-century  has 
lain  in  her  pacific  attitude  and  in  the  support  of  other  nations 
which  this  attitude  has  brought  to  her.  Her  policy  since 
1870  has  been  one  of  unaggressive  self-defense.  Her  motto 
among  the  nations  of  Europe  has  been  to  live  and  let  live. 
If  now  her  motives  change — if  it  becomes  apparent  that  she 
is  bent  on  military  conquest,  however  great  the  provocation 
— she  will  find  her  former  friends  rapidly  dropping  away 
from  her.  Italy  has  already  been  estranged,  and  Great 
Britain  would  come  to  a  definite  break,  since  she  could 
not  countenance  either  the  economic  control  in  Europe 
which  the  mineral  resources  of  the  Ruhr,  of  the  major  por- 
tion of  upper  Silesia,  and  of  Alsace-Lorraine  would  give  to 
France,  or  the  political  hegemony  which  would  follow  in 
case  France  succeeded  in  the  policy.  Moreover,  as  we  have 
seen.  Great  Britain  would  not  be  willing  to  join  France  in 
any  undertaking  designed  to  destroy  German  economic  life, 
and  with  it  English  industrialism,  which  is  dependent  upon 
German  trade.  Finally,  if  France  should  thus  take  the  bit 
in  her  teeth,  the  United  States,  it  would  seem,  would  be 
compelled  to  withdraw  further  from  European  affairs,  leav- 
ing the  continent  to  stew  in  its  own  grease.  France  would 
thus  find  herself  isolated  and  disliked  on  every  hand,  just  as 
Germany  was  before  the  war. 

In  the  long  run,  moreover,  such  a  policy  would  not  give 


POLITICAL  FACTORS  IN  SITUATION  297 

France  the  military  security  which  she  desires.  Few 
students  of  international  affairs  can  be  found  who  in  their 
hearts  believe  that  it  would  be  possible  for  the  French  to 
dominate  and  control  German  economic  and  political  life 
for  an  indefinite  period.  The  French  have  not  the  requisite 
man-power  or  organizing  power;  indeed,  no  nation  has  the 
resources  or  the  political  capacity  to  police  and  control  the 
life  of  a  foreign  nation  of  almost  double  its  own  population 
and  developed  to  a  high  degree  of  industrial  efficiency. 


Part  III — Remedies — Proposed  and  Real 


CHAPTER  XIX 

THE  LIMITATIONS  OF  FOREIGN  CREDITS 

A  Tangled  Net 

"Any  citation  of  the  separate  obstacles  to  economic  re- 
covery gives  but  an  imperfect  picture  of  the  paralyzing 
influence  of  their  concurrent  action.  Nor  does  it  adequately 
represent  the  general  disintegration  and  enfeeblement  due  to 
the  breakdown  of  the  exchanges  and  the  international  money 
famine  from  which  the  greater  part  of  Europe  is  suffering. 
In  once  prosperous  countries  we  witness  today  the  rapid  dis- 
solution of  highly  complex  economic  organisms  into  low 
forms  of  primitive  production,  eked  out  by  barter.  In  social 
pathology  the  disease  may  rank  as  general  paralysis,  a  failure 
to  function  on  the  part  of  the  nerve  centers  of  the  economic 
system.  The  full  extent  of  the  danger  only  now  appears, 
when  the  hectic  energy  and  artificial  prosperity  left  by  the 
war  have  died  down,  leaving  a  bewildered  world  struggling 
to  restore  out  of  its  broken  fragments  the  delicate  and  com- 
plex fabric  of  industry,  commerce,  and  finance,  which  the 
Great  War  and  Bad  Peace  have  brought  to  ruin."  ^ 

The  tangled  net  of  international  economic  and  political 
relations,  which  now  binds  in  helpless  confusion  the  peoples 
of  the  earth,  must  somehow  be  broken  if  the  world  is  again 
to  be  set  moving  in  the  direction  of  economic  and  social 
progress.     It  is  the  task  of  the  concluding  division  of  this 


*J.  A.  Hobson,  in  Report  of  International  Economic  Conference, 
London,  October,  1920. 

299 


30O  REMEDIES— PROPOSED  AND  REAL 

volume  to  suggest  in  broad  outlines  the  policies  or  lines  of 
action  which  the  practical  statesmen  of  the  world  must  adopt 
if  peace  and  prosperity  are  to  be  restored.  We  shall  not 
presume  to  present  a  detailed  program  of  reconstruction.  In 
the  light  of  our  studies  of  the  complicated  interrelations  of 
economic  and  political  factors  which  constitute  the  problem, 
we  realize,  perhaps  better  than  others,  the  impossibility  of 
presenting  at  the  present  moment  any  completed  program  of 
reconstruction.  Such  a  program  can  be  formulated  only 
after  prolonged  counsel  among  the  practical  statesmen  of 
the  world.  What  we  may  be  permitted  to  suggest,  however, 
is:  (i)  what  things  must  be  done;  (2)  who  must  undertake 
the  things  to  be  done;  and  (3)  how  they  are  to  be 
accomplished. 

This  and  the  following  chapter  will  be  devoted  to  a  con- 
sideration of  two  suggested  remedies  which  have  been 
proposed  in  various  quarters  and  widely  discussed  during  the 
past  year.  The  first  relates  to  the  extension  of  further 
credits  to  Europe,  and  the  second  to  the  stabilization  of  the 
international  exchanges.  In  conclusion  we  shall  present 
what  we  conceive  to  be  the  requisite  essentials  of  an  inter- 
national policy  of  reconstruction. 

Argument  for  Extension  of  Credits 

The  extension  of  credits  by  the  United  States  to  Europe 
has  been  repeatedly  urged  as  the  only  solution  of  the 
European  problem.  Immediately  after  the  Armistice  there 
were  official  suggestions  of  huge  American  loans,  of  10  or 
15  billion  dollars,  for  reconstruction  work  in  France  alone. 
While  the  total  figures  have  in  the  intervening  months  been 
gradually  whittled  down  to  more  commensurable  amounts, 
there  has  been — until  recently  at  least — little  abatement  of 
confidence  in  foreign  credits  as  the  panacea  for  the  European 
situation.    In  this  chapter  we  shall  review  briefly  the  history 


LIMITATIONS  OF  FOREIGN  CREDITS  3OI 

of  foreign  credits  since  the  war,  and  point  out  the  rigid 
limitations  upon  further  loans  as  a  solution  of  the  European 
problem. 

In  the  chapter  on  the  foreign  exchanges  we  found  that 
the  war  had  caused  an  enormous  dislocation  of  international 
trade  and  financial  operations.  It  will  be  recalled  that  the 
great  increase  in  exports  from  the  United  States,  as  well 
as  from  neutral  countries,  resulted  (i)  in  shifting  a  dis- 
proportionate quantity  of  the  gold  supply  of  the  world  to 
the  United  States;  (2)  in  the  resale  to  the  United  States  of 
European  investments  in  American  securities;  and  (3)  in 
the  creation  of  huge  foreign  debts  to  the  United  States.  In 
four  swift  years  the  United  States  was  converted  from  the 
greatest  debtor  to  the  greatest  creditor  nation  in  the  world. 
The  outstanding  effect  of  this  shift  in  American  trade  and 
financial  position  has  been  to  depreciate  European  currencies 
as  compared  with  the  American  dollar.  The  outflow  of  gold 
contributed  to  the  abandonment  of  the  gold  standard  in 
Europe,  while  the  disruption  and  maladjustment  of  interna- 
tional trade  and  the  redistribution  of  international  securities 
added  to  the  depressing  effects  upon  the  European 
exchanges. 

We  have  already  seen  that  the  three  years  that  have 
elapsed  since  the  conclusion  of  the  war  have  only  served  to 
increase  this  maladjustment  between  the  old  world  and  the 
new.  European  domestic  currencies,  speaking  generally, 
have  still  further  depreciated;  our  trade  exports  have,  until 
the  last  year,  been  even  larger  than  during  the  war  period ; 
European  loans  from  the  United  States  have  been  increased 
by  several  billions  of  dollars ;  and  huge  additional  quantities 
of  gold  have  flowed  from  the  depleted  coffers  of  Europe  to 
the  banking  institutions  of  the  United  States.  In  conse- 
quence the  exchange  situation  is  now  as  distressing  a  prob- 
lem as  ever,  and  international  financial  reorganization  in 


302  REMEDIES— PROPOSED  AND  REAL 

general  is  quite  as  far  from  accomplishment  as  at  the  time 
of  the  Armistice. 

Even  before  governmental  control  of  the  exchanges  was 
abandoned  in  the  spring  of  1919,  numerous  students  of  in- 
ternational finance  had  pointed  out  that  the  United  States 
must  increase  its  investments  of  foreign  securities  if 
depreciation  of  the  exchanges  was  to  be  prevented.  De- 
preciation of  the  exchanges,  it  will  be  recalled,  is  in  part  ^ 
caused  by  an  excessive  supply  of  bills  of  exchange.  Now, 
whenever  anyone  in  the  United  States  invests  in  foreign 
securities  he  demands  bills  of  exchange  with  which  to  pay 
for  the  securities  purchased.  Accordingly,  if  Americans 
will  buy  foreign  securities  in  amounts  equal  to  the  excess  of 
the  supply  of  bills  of  exchange  over  the  ordinary  demand 
therefore,  the  total  demand  and  supply  will  be  equalized  and 
exchanges  will  rise  towards  par.  One  must  say  towards  par 
rather  than  to  par,  for  the  reason  that  actual  parity  cannot  be 
attained  until  European  nations  are  once  more  on  the  gold 
standard.  Foreign  investments  are  therefore  looked  to  as 
a  means  of  lessening  the  depreciation  of  the  European  cur- 
rency. Moreover,  American  foreign  trade  would  be  facili- 
tated by  this  appreciation  of  the  European  exchanges,  for 
the  disadvantage  of  buying  in  American  markets  would  be 
lessened  to  the  extent  that  the  depreciation  of  the  European 
exchanges  as  compared  with  the  dollar  was  lessened. 

It  should  be  understood,  at  the  same  time,  that  these 
investments  in  foreign  securities  give  to  foreigners  increased 
purchasing  power  and  this  enables  them  to  increase  to  that 
extent  their  purchases  of  goods  in  the  United  States.  Indeed, 
the  making  of  foreign  investments  really  means  shipping 
goods  abroad  on  credit.  One  should  recall  in  this  connection 
that  the  present  huge  foreign  debts  to  the  United  States 


'In  part,  also,  by  depreciated  paper  money  in  Europe.     See  pages 
20-21. 


LIMITATIONS  OF  FOREIGN  CREDITS  303 

were  largely  created  by  the  shipment  of  war  materials  to  the 
Allied  nations. 

Such  is  the  argument  for  an  extension  of  American 
credits  abroad.  Most  European  countries  still  apparently 
need  American  credits.  And  America  would  like  to  ex- 
tend the  credits  if  possible,  in  order  to  stimulate  our  exports 
and  thus  revive  industrial  prosperity  here.  Foreign  credits, 
therefore,  appear  to  constitute  a  central  feature  in  any 
program  of  international  reconstruction. 

Early  Optimism 

Before  undertaking  to  discuss  the  main  issue  of  this 
chapter — namely,  how  far  foreign  credits  will  now  suffice  to 
restore  world  prosperity — it  will  be  helpful  to  survey  briefly 
the  history  of  American  foreign  investments  since  the  war. 
The  need  of  extending  financial  assistance  to  Europe  was 
first  strikingly  presented  in  the  United  States  by  Frank  A. 
Vanderlip,  then  president  of  the  National  City  Bank  of 
New  York.  In  Mr.  Vanderlip's  view,  if  Europe  were  to 
recover  from  the  enormous  loss  of  the  war  and  escape 
political  and  social  disintegration,  it  was  imperative  that  the 
wheels  of  industry  be  started  by  means  of  a  vast  loan  from 
the  United  States.  Since  the  security  of  individual 
European  enterprises  could  not  find  a  ready  market  with 
American  investors,  and  since  every  portion  of  Europe  must 
be  given  assistance  if  the  spectre  of  bolshevism  were  to  be 
effectively  laid,  Mr.  Vanderlip  urged  that  there  must  be  a 
pooling  of  all  European  resources,  whereby  one  gigantic 
loan  might  be  extended  to  Europe  as  a  whole,  secured  by  a 
joint  guarantee  of  the  several  European  governments,  with 
liens  upon  customs  revenues  as  security. 

Mr.  Vanderlip's  proposal  fell  upon  deaf  ears,  partly 
because  it  called  for  a  mobilization  of  world  financial  re- 
sources on  a  scale  too  stupendous  for  the  average  man  to 


304  REMEDIES— PROPOSED  AND  REAL 

grasp,  but  mainly  because  Mr.  Vanderlip's  views  as  to  the 
gravity  of  the  European  situation  were  shared  by  few 
American  business  men.  In  the  spring  of  1919  the  over- 
whelming majority  of  Americans  believed  that  vociferously 
expressed  optimism  was  about  all  that  was  required  to 
restore  the  losses  of  the  war.  Did  not  the  great  need  of  the 
world  for  increased  production  provide  the  basis  for  a  long 
period  of  intense  business  activity  and  prosperity  for  every- 
one? A  pessimist — even  an  intellectual  one — was  regarded 
a  national  menace. 

The  Utilization  of  Banking  Credit 

Meanwhile  credits  continued  to  be  extended  to  Europe. 
The  government  continued  to  make  loans,  the  total  increas- 
ing from  less  than  9  to  approximately  10  billions  in  the  year 
following  the  Armistice.  In  the  main,  however,  post-war 
credits  to  Europe  were  extended  in  another  way — one  that 
had  not  been  contemplated  to  any  great  extent,  and  one  that 
on  grounds  of  financial  theory  was  not  to  be  countenanced. 
American  business  men  exported  commodities  on  what  were 
presumed  to  be  short-term  commercial  credits.  The  ex- 
porters, as  is  the  custom,  financed  their  needs,  pending  the 
receipt  of  payments  from  abroad,  by  borrowing  from  the 
commercial  banks.  The  process,  of  course,  resulted  in  a 
great  expansion  of  bank  loans  and  in  a  rapid  lessening  of 
commercial  bank  reserves  in  this  country.  Europe  was  thus 
enabled  to  get  the  goods  required,  and  American  business 
received  a  great  stimulus,  one  of  the  results  of  which  was 
rapidly  mounting  prices. 

We  have  said  that  the  loans  were  presumably  made 
for  short  periods  only.  It  developed,  however,  that  in  con- 
sequence of  Europe's  inability  to  pay,  these  loans  of  bankers 
to  American  business  men  had  to  be  renewed  again  and 
again — in  fact  indefinitely.     The  result  was  that  for  all 


LIMITATIONS  OF  FOREIGN  CREDITS  305 

practical  purposes  they  became  long-term  credits.  These 
credits  are  still,  in  the  main,  owing  to  American  business 
men,  who  in  turn  are  still  indebted  to  the  banks  for  the 
amounts  involved,  which  run  into  billions  of  dollars. 

This  process  of  extending  credits,  however,  eventually 
ran  its  course.  When  the  reserves  of  the  federal  reserve 
banks  were  reduced  as  a  result  of  this  and  other  causes  to 
the  danger  point — that  is  to  say,  to  a  point  beyond  which 
they  could  not  go  without  our  passing  from  a  system  of  gold 
redemption  to  one  of  inconvertible  paper — it  had  to  be 
altered.  ^ 

It  was  all  along  recognized  by  leading  financiers  and 
economists  that  this  method  of  financing  foreign  trade  was 
unsound  and  should  not  be  allowed  to  continue  even  if  it 
could.  Europe  wanted  the  goods,  however,  and  American 
exporters  wanted  the  sales;  and  with  no  other  means  of 
financing  available,  both  exporters  and  bankers  appeared 
willing  to  take  the  chance — small  chance,  it  was  assumed, 
because  Europe  was  to  come  back  with  giant  strides. 

The  Edge  Act 

The  other  possible  means  of  financing  Europe's  needs 
was  by  long-term  investment  credits.  Investment  in 
foreign  securities  by  the  American  people  was  severely 
hampered,  however,  because  of  inadequate  financial 
machinery  for  the  purpose.  In  brief,  the  American  investor 
was  unfamiliar  with  the  merits  of  European  securities,  and 
was  unwilling  to  assume  the  risks  involved.  What  was 
needed  was  some  means  whereby  he  could  invest  in  the 
securities  of  American  financial  corporations,  backed  by  the 
European  securities  as  collateral.  European  nations,  par- 
ticularly Great  Britain,  had  long  had  foreign  financing  cor- 


*  There  was  also  a  bare  possibility  of  a  financial  panic  ensuing. 

80 


306  REMEDIES— PROPOSED  AND  REAL 

porations  known  as  "investment  trusts,"  which  made  it 
possible  for  British  investors  to  invest  abroad  with  a 
minimum  of  risk. 

The  principle  underlying  such  financial  institutions  is  in 
brief  as  follows :  The  foreign  securities  are  purchased  by 
the  investment  trust  or  financial  corporation,  and  placed  in 
trust  as  collateral  security  for  its  own  bonds  which  are  sold 
to  investors  within  the  country.  The  individual  thus 
purchases  the  obligation  of  a  well-known  domestic  financial 
institution  rather  than  one  of  a  relatively  little  known 
foreign  corporation.  Moreover,  he  is  able  to  distribute  his 
risks  more  widely;  his  security  is  in  effect  the  combined 
earnings  of  all  the  foreign  borrowers  whose  bonds  are  held 
as  collateral  security,  in  addition  to  the  capital  resources  of 
the  investment  trust  itself. 

It  was  not  until  December,  1919,  that  the  necessary  con- 
gressional legislation  could  be  secured  for  the  formation  of 
such  financing  corporations  in  the  United  States.  The 
Edge  Act  then  finally  authorized  the  establishment  of 
American  investment  trusts,  popularly  designated  here  as 
"foreign  financing  corporations."  It  was  another  twelve 
months,  however,  before  any  large  effort  was  put  forth  to 
organize  financing  institutions  under  the  provisions  of  the 
law.  There  had  already  been  two  or  three  financing  corpora- 
tions organized  under  state  law,  and  early  in  1920  one  was 
organized  under  the  Edge  Law. 

But  the  inability  of  these  corporations — which  were  of 
only  moderate  size — to  solve  the  problem  became  so  apparent 
that  in  December,  1920,  an  effort  was  made  to  launch  a 
huge  foreign  financing  corporation,  one  that  would  be 
worthy  of  American  financial  genius.  A  capital  of  $100,- 
000,000  was  determined  upon,  which  would  make  possible 
the  purchase  and  sale  of  securities  to  the  amount  of  one 
billion  dollars.     A  nation  wide  campaign  of  education  was 


LIMITATIONS  OF  FOREIGN  CREDITS  307 

undertaken,  with  a  view  to  enlisting  the  interest  of  all  classes 
of  business  men,  financial,  manufacturing,  commercial,  and 
agricultural.  Even  the  interest  of  laborers,  as  potential 
investors,  was  besought. 

Almost  another  year  has  elapsed  and  this  corporation  has 
been  unable  to  secure  the  necessary  capital,  owing  to  a  com- 
bination of  factors,  including  the  business  depression  and 
the  outright  opposition  on  the  part  of  many  leading  finan- 
ciers. The  chief  objection  to  the  plan  is  that  the  organiza- 
tion of  a  corporation  of  such  tremendous  size  is  unnecessary 
and  even  dangerous  when  it  is  by  no  means  certain  that  there 
is  any  great  volume  of  foreign  security  business  in  sight. 
It  is  feared,  moreover,  that  it  will  be  impossible  to  secure 
the  personnel  with  which  to  administer  so  large  and  so  diffi- 
cult an  undertaking. 

One  of  the  greatest  difficulties  on  the  administrative  side 
is  that  of  making  certain  that  the  securities  offered  are  safe. 
Lack  of  definite  knowledge  of  the  standing  of  individual 
European  borrowers  is  one  handicap.  But  much  more  im- 
portant is  the  general  insecurity  of  conditions  in  Europe. 
The  individual  borrower  may  appear  to  be  sound  enough, 
both  financially  and  morally.  But  the  instability  of  the 
exchanges,  the  disruption  of  transportation,  the  disorgani- 
zation of  commercial  relationships,  social  unrest  and  politi- 
cal instability,  combine  to  multiply  the  risks  which  the  lender 
must  assume.  Improved  organization  of  the  credit  machin- 
ery of  Europe  is  now  universally  conceded  to  be  necessary 
if  American  credits  are  to  be  greatly  extended. 

In  this  connection  it  is  noteworthy  that  none  of  the  over- 
seas financing  corporations  that  have  been  organized  by 
the  largest  financial  interests  in  the  United  States  have  thus 
far  succeeded  in  developing  any  appreciable  volume  of  busi- 
ness. Without  exception,  they  have  found  the  practical 
difficulties  of  an  insuperable  character. 


308  REMEDIES— PROPOSED  AND  REAL 

The  "Ter  Meulen"  Plan 

With  a  view  to  overcoming  the  present  insecurity  of 
European  investments,  there  has  been  developed  during  the 
last  year  the  so-called  "Ter  Meulen"  scheme,  named  after 
its  originator,  a  prominent  Dutch  financier.  This  plan  has 
been  indorsed  by  the  International  Financial  Conference, 
which  was  held  in  Brussels  in  the  autumn  of  1920,  under 
the  auspices  of  the  League  of  Nations.  It  has  since  been  in- 
dorsed by  the  Council  of  the  League  of  Nations,  and  by  the 
International  Chamber  of  Commerce  at  its  conference  in 
London,  June,  192 1.  The  Ter  Meulen  plan,  therefore,  is 
the  next  experiment  in  extending  credit  to  the  distressed 
nations  of  Europe. 

In  brief,  the  purpose  of  the  plan  is  to  encourage  export 
trade  by  providing  a  special  form  of  security,  which  will 
reinforce  the  credit  of  the  European  importers.  The 
exporter,  as  under  present  conditions,  seeks  out  his  own 
customer  in  Europe,  arranges  the  terms  of  sale,  and  inves- 
tigates the  credit  standing  of  the  buyer.  But  in  order  to 
improve  his  credit  standing,  and  thus  make  it  possible  to 
purchase  the  goods  required  on  more  favorable  terms,  the 
importer  approaches  his  government  and  borrows  from  it 
for  the  period  of  the  credit  "Ter  Meulen"  bonds,  which  he 
may  use  as  collateral  for  his  own  promise  to  pay.  Each 
borrowing  government  will  arrange  the  conditions  under 
which  it  will  loan  bonds  to  its  citizens.  But  before  the 
whole  transaction  is  completed,  the  approval  of  an  inter- 
national commission,  to  be  appointed  by  the  League  of 
Nations,  must  be  obtained.  This  commission  must  satisfy 
itself  that  the  imports  consist  of  "necessary"  commodities. 
It  must  also  see  that  the  total  amount  of  bonds  authorized 
for  issue  is  not  exceeded.  Thus  international,  non-partisan, 
and  presumably  scientific,  control  is  secured. 

To  make  the  credit  sound  it  is  obvious  that  there  must 


LIMITATIONS  OP  FOREIGN  CREDITS  309 

be  satisfactory  security  back  of  the  government  bonds.  The 
plan,  therefore,  provides  that  the  governments  which  issue 
the  bonds  shall  pledge  as  security  revenue-producing  assets 
(to  which  a  gold  value  can  be  assigned)  of  sufficient  amount 
to  satisfy  the  international  commission.  It  is  suggested  that 
the  most  suitable  assets  for  the  purpose  would  be  export 
and  import  duties,  and  revenues  from  state  railways,  govern- 
ment monopolies,  forests,  etc. 

According  to  the  plan,  in  case  the  importer  is  unable 
to  pay  for  the  goods  when  payments  are  due,  the  exporter 
who  has  extended  the  credit  may  seize  the  collateral  security 
— the  Ter  Meulen  bonds — in  satisfaction  of  his  claims. 
These  bonds  he  may  then  either  hold  as  an  investment  or 
sell  in  the  investment  market.  It  will  doubtless  be  provided, 
however,  that  if  he  wishes  to  sell  the  bonds  they  must  first 
be  offered  to  the  issuing  government,  so  that  it  may  buy 
them  in  if  it  so  desires.  It  should  be  added  that  these  Ter 
Meulen  bonds  may  be  sold  to  American  investors  through 
the  foreign  financing  corporations ;  or  they  may  be  pledged 
as  collateral  by  the  financing  corporations  against  their  own 
securities,  which  may  be  issued  for  sale  to  American  inves- 
tors. The  rate  of  interest  on  these  bonds  will  be  fixed  by 
each  country.  While  all  the  details  have  not  been  deter- 
mined— to  our  knowledge — it  is  suggested  that  the  rate 
should  be  the  normal  rate  that  such  country  might  expect 
to  have  to  pay  in  the  open  market.  The  duration  of  the 
bonds  will  doubtless  be  from  five  to  ten  years. 

It  should  be  observed  that  the  Ter  Meulen  scheme  has 
three  principal  features.  First,  it  permits,  in  large  measure, 
the  utilization  of  existing  trade  and  financial  practice  and 
machinery.  The  export  may  be  arranged  as  heretofore 
through  ordinary  private  channels;  and  the  Ter  Meulen 
bonds  may  be  marketed  through  the  already  established 
financial  agencies.     Second,  it  permits  the  greatest  possible 


3IO  REMEDIES— PROPOSED  AND  REAL 

amount  of  flexibility,  allowing  the  methods  to  be  adjusted 
to  the  varying  conditions  in  different  countries.  Third,  and 
this  is  the  heart  of  the  plan,  it  sets  up  machinery  for  placing 
back  of  the  credit  of  the  individual  the  credit  of  his  govern- 
ment. 

Not  a  Vital  Remedy 

What  now  is  the  hope  from  this  Ter  Meulen  scheme? 
Will  it  solve  the  problem  of  overseas  credit  and  thus  make 
possible  an  early  restoration  of  European  trade  and  indus- 
try? After  much  discussion  of  this  subject  with  financiers 
and  economists  both  at  home  and  abroad,  we  have  been 
forced  to  conclude  that  the  Ter  Meulen  plan  will  not  prove 
of  great  importance.  It  is  worth  trying  out  if  only  for  the 
lessons  to  be  learned  from  such  a  trial.  And  here  and  there, 
no  doubt,  some  credit  will  be  extended  through  the  aid  of 
Ter  Meulen  bonds.  But  the  plan  will  fail  of  accomplishing 
large  results,  for  the  reason  that  it  does  not  reach  to  the 
heart  of  the  European  question. 

So  long  as  the  budgets  of  European  countries  remain 
unbalanced,  and  so  long  as  imports  remain  greatly  in  excess 
of  exports,  Europe  will  not  be  able  to  pay  interest  on  Ter 
Meulen  bonds.  The  revenues  which  are  to  be  set  aside  for 
the  purpose  in  hand  are  vitally  necessary  for  ordinary  fiscal 
requirements.  When  a  nation's  revenues  are,  for  example, 
but  half  the  ordinary  expenses,  it  may  conceivably  prove 
possible  for  an  international  commission  to  appropriate 
what  revenue  there  is  for  the  payment  of  interest  on  Ter 
Meulen  bonds.  But  this  would  not  prevent  a  continuously 
unbalanced  internal  budget  in  the  country  in  question  and 
thus  a  progressive  deterioration  of  the  internal  economic 
organization.  On  the  contrary,  it  would  intensify  the 
budgetary  difficulties.  Now  if  budgets  are  not  balanced,  it 
will  prove  impossible  to  prevent  the  Ter  Meulen  bonds  from 


LIMITATIONS  OP  FOREIGN  CREDITS  311 

depreciating  in  value,  thereby  reducing  their  marketability 
in  the  investment  markets.  To  present  the  question — What 
would  have  been  the  fate  of  German  or  Polish  Ter  Meulen 
bonds  in  the  light  of  the  recent  fall  in  Polish  and  German 
marks? — is  to  answer  it. 

In  consequence  of  considerations  such  as  these,  it  is  not 
at  all  certain  that  American  and  British  exporters  will  be 
quick  to  try  out  the  plan.  While  supporting  the  scheme  as 
one  that  contains  some  possibility,  A.  J.  Hobson,  chairman 
of  the  British  delegation  at  the  June  meeting  of  the  Inter- 
national Chamber  of  Commerce  in  London,  warned  British 
exporters  against  too  free  a  use  of  the  plan.  He  pointed 
out  that  not  even  a  stock  exchange  speculator  would  be  will- 
ing to  buy  the  securities  of  corporations  which  possessed 
a  power  of  increasing  without  limit  their  outstanding  obliga- 
tions. So  long  as  European  governments  have  the  power 
of  unlimited  issue  of  paper  currency,  the  wise  business  man 
will  proceed  with  caution  in  accepting  Ter  Meulen  bonds. 

American  Investing  Capacity 

It  remains  to  be  noted  that  there  is  little  chance  that 
British  and  American  investors,  particularly  the  latter,  will 
be  either  willing  or  able  to  absorb  any  considerable  volume 
of  Ter  Meulen  bonds.  So  far  as  England  is  concerned,  her 
investment  capacity  has  been  enormously  reduced  in  conse- 
quence of  the  staggering  burden  of  post-war  taxation.'* 
As  regards  the  investing  capacity  of  the  United  States, 
it  will  be  recalled  that  the  credits  extended  to  Europe  dur- 
ing 1919-1920  were  largely  banking  credits,  the  funds  com- 
ing from  bank  loan  expansion  rather  than  from  investment 
savings.  Indeed,  except  during  the  war  period,  when,  under 
the  spur  of  large  monetary  profits  and  wages,  and  under  the 


*  See  discussion  on  pages  131-133. 


312  REMEDIES— PROPOSED  AND  REAL 

lash  of  the  Liberty  Loan  campaign,  we  patriotically  bought 
Liberty  bonds  and  thus  enabled  the  government  to  make 
loans  abroad,  the  United  States  has  shown  little  capacity 
to  furnish  foreign  capital.  It  must  be  recalled  that  of  the 
10  billions  of  funds  loaned  by  the  United  States  govern- 
ment abroad,  a  very  considerable  per  cent  does  not  represent 
real  savings,  but  only  bank  credit  expansion.^  Moreover, 
during  the  period  of  the  war  our  investments  in  railroad, 
public  utility,  and  housing  enterprises  were  summarily  cur- 
tailed. Looking  ahead,  there  is  little  possibility  of  our 
financing  overseas  investments  in  addition  to  domestic  re- 
quirements so  long  as  business  depression  continues.  And 
in  case  we  have  a  business  revival,  the  volume  of  domestic 
loans  to  be  floated  will  severely  tax  our  entire  investment 
capacity. 

It  will  assist  to  an  understanding  of  the  future  of  Ameri- 
can foreign  credits  if  it  is  clearly  appreciated  that  it  is  an 
anomaly  for  a  nation  such  as  the  United  States  to  be  in  the 
position  of  creditor  to  the  rest  of  the  world.  No  nation 
before  ever  became  a  great  creditor  when  its  own  internal 
industrial  resources  were  so  incompletely  developed,  as  is 
still  the  case  with  the  United  States. 

England,  to  take  the  best  example  of  a  "legitimate" 
lender  of  foreign  capital,  began  to  emerge  as  a  creditor 
nation  when  the  volume  of  her  annual  savings  exceeded  the 
requirements  of  her  domestic  industries.  These  excess  sav- 
ings then  naturally  sought  overseas  employment;  indeed, 
they  were  forced  to  seek  a  foreign  outlet.  The  machinery 
for  making  such  investments,  moreover,  gradually  developed 
to  meet  the  needs  of  the  gradually  changing  industrial  and 
financial  status  of  the  nation.  In  a  word,  England  arrived 
at  her  creditor  position  as  a  result  of  many  generations  of 


See  discussion  of  the  process  of  war  financing  on  pages  64-67. 


LIMITATIONS  OF  FOREIGN  CREDITS  313 

gradual  development;  in  consequence  her  economic  organi- 
zation was  never  thrown  out  of  adjustment  as  a  result  of 
the  process. 

The  present  financial  position  of  the  United  States  is, 
however,  fundamentally  different.  We  have  become  almost 
overnight  a  huge  creditor  nation.  As  a  result  of  temporary 
war  demands,  we  forced  the  development  of  our  manufac- 
turing capacity  much  in  excess  of  ordinary  domestic  require- 
ments, and  we  were  thereby  enabled  to  repurchase  European 
holdings  of  American  securities  and  to  extend  the  vast  loans 
which  converted  us  from  a  great  debtor  to  a  great  creditor 
nation.  We  are  now  seeking  to  accomplish  the  impossible — 
to  make  permanent  the  foreign  markets  which  the  temporary 
exigencies  of  the  war  provided. 

Moreover,  as  a  creditor  nation  England  had  an  unfavor- 
able balance  of  trade,  receiving  the  interest  on  her  foreign 
investments  in  the  form  of  an  excess  of  imports  over  ex- 
ports. The  United  States,  on  the  other  hand,  is  in  the 
anomalous  position  of  hoping  to  maintain  a  permanent  large 
excess  of  exports  over  imports,  at  the  same  time  that  it  re- 
ceives interest  on  the  huge  foreign  investments  that  grew 
out  of  the  exigencies  of  war  financing.  We  might  as  well 
attempt  to  make  water  run  up-hill.  In  view  of  our  excess 
manufacturing  capacity  and  the  present  adjustment  of  our 
whole  economic  organization  to  the  production  of  goods 
for  export,  we  are  not  in  a  position  to  face  the  prospect  of 
having  interest  paid  in  goods,  with  economic  composure. 
The  situation  is  fundamentally  different  from  that  of  Eng- 
land before  the  war,  where  the  position  as  a  creditor  nation 
was  attained  gradually  as  a  result  of  normal  trade  and 
financial  processes. 

In  any  case  it  is  idle  to  suppose  that  we  could  finance 
huge  additional  credits.  Our  own  internal  industries,  par- 
ticularly those  that  were  neglected  during  the  war,  will  con- 


314  REMEDIES— PROPOSED  AND  REAL 

tinue  to  require  substantially  all  the  investment  resources 
of  the  country.  In  the  absence  of  the  war  there  is  little,  if 
any,  doubt  that  the  United  States  would  have  continued  to 
be  a  borrowing  nation  for  many  years  to  come.  The  events 
of  the  war  have  in  no  way  changed  the  fundamental  require- 
ments of  the  situation;  they  have  merely  demoralized  the 
trade  and  financial  relations  of  nations  and  raised  the  most 
difficult  problems  of  economic  reorganization  the  world  has 
ever  known. 

Factors  in  American  Investment  Situation 

The  American  position  with  reference  to  future  foreign 
loans  was  strongly  presented  at  the  International  Chamber 
of  Commerce  meeting  in  London  by  George  E.  Roberts, 
vice-president  of  the  National  City  Bank  of  New  York. 
After  observing  that  the  United  States  is  still  a  new  and 
undeveloped  country,  and  that  over  a  large  part  of  the  coun- 
try the  people  are  accustomed  to  devote  their  savings  mainly 
to  the  extension  of  their  own  immediate  businesses,  or  to  in- 
vestment in  local  enterprises,  he  pointed  out  other  reasons 
which  render  large  additional  American  investments  abroad 
impossible.     He  said: 

"The  competition  for  capital  for  domestic  enterprises 
has  made  interest  rates  high,  and  the  new  offerings  of  securi- 
ties at  high  rates  has  had  the  effect  of  depressing  entire  lists 
of  outstanding  securities  and  stocks,  so  that  they  yield  high 
returns  upon  present  prices.  Other  factors  in  the  situation 
are  the  high  rates  of  taxation,  and  the  fact  that  municipal 
securities,  to  some  extent,  and  bonds  of  the  federal  govern- 
ment are  exempt  from  taxation.  The  total  amount  of 
securities  wholly  exempt  now  outstanding  is  estimated  at 
approximately  15  billion  dollars,  and  is  being  constantly  in- 
creased by  new  issues  .  .  .  The  presence  of  this  large  body 
of  tax-exempt  securities  has  the  effect  of  practically  elimi- 


LIMITATIONS  OF  FOREIGN  CREDITS  315 

nating  investors  of  high  incomes  as  buyers  of  securities  sub- 
ject to  taxation.  To  an  individual  of  an  income  subject  to 
our  maximum  tax  rate,  an  exempt  4  per  cent  federal  or 
municipal  bond  yields  an  equivalent  of  14.81  per  cent  inter- 
est. Conversely,  a  taxable  7  per  cent  investment,  such  as  a 
real  estate  mortgage,  an  industrial,  or  railroad  bond,  or  a 
foreign  government  bond,  after  tax  payments  actually  yields, 
under  the  higher  schedules,  less  than  2  per  cent.  This  cal- 
culation is  based  on  federal  taxes  only,  and  there  is  local 
taxation  to  be  considered  besides." 

These  considerations  take  the  wealthy  investors  out  of 
the  market  for  European  securities,  except  at  rates  of  inter- 
est which  Europe  would  regard  as  utterly  extortionate. 

This  fact,  coupled  with  other  considerations  already 
noted,  makes  it  impossible  for  the  United  States  to  finance 
Europe  henceforth  on  any  very  extensive  scale.  All  of  our 
experience  up  to  date  confirms  this  judgment.  We  trust 
there  will  be  no  misunderstanding  here ;  we  are  not  contend- 
ing that  a  great  many  millions  may  not  still  be  extended. 
But  the  days  of  billions  of  overseas  credit  are  definitely  past, 
for  at  least  a  generation.  The  only  possibility  of  extending 
the  credits  would  be  through  a  renewal  of  export  sales  on 
credits  furnished  through  further  bank  inflation.  In  view 
of  the  fact  that  much  the  greater  part  of  the  credits  thus 
extended  are  still  unpaid,  with  American  exporters  and  their 
bankers  pocketing  the  losses,  there  is  little  likelihood  of  an 
extensive  resumption  of  this  process. 

International  Action  Suggested 

One  further  plan  of  extending  foreign  credits,  already 
mentioned,  has  been  frequently  suggested,  among  others,  by 
Frank  A.  Vanderlip,  and  by  Sir  George  Paish,  the  former 
editor  of  the  London  Statist.  In  the  view  of  these  men 
the  problem  of  Europe  must  be  conceived  as  one  problem; 


31 6  REMEDIES— PROPOSED  AND  REAL 

that  is  to  say,  It  is  idle  to  talk  of  extending  credits  to  this, 
that,  or  the  other,  particular  individual  in  Europe,  or  to  this, 
that,  or  the  other,  particular  government  in  Europe.  The 
problem  must  be  dealt  with  on  a  continental  scale;  there 
must  be  a  pooling  of  all  European  resources,  whereby  large 
loans  may  be  extended  to  Europe  as  a  whole,  secured  by  the 
joint  guarantee  of  the  European  governments.  Sooner  or 
later,  it  is  believed,  this  will  have  to  be  done  if  Europe  is 
to  be  saved.     International  action  alone  will  suffice. 

This  is  undoubtedly  sound  doctrine;  because  of  the  es- 
sential unity  of  the  world  economic  problem.  But  we  should 
still  have  to  face  the  restricted  absorbing  capacity  of  the 
American  (and  British)  investment  markets.  Such  a  loan, 
if  it  did  not  exceed  a  few  hundred  millions,  might  be  ab- 
sorbed in  the  course  of  a  few  years.  If  it  ran  into  billions, 
it  could  not  be  handled. 

Huge  Credits  Not  the  Principal  Remedy 

When  all  is  said  and  done,  the  way  out  for  Europe  and 
the  world  does  not  mainly  lie  in  huge  additional  credit 
extensions  by  the  United  States  to  Europe.  No  one  can 
have  an  appreciation  of  the  sources  of  disturbance  in  inter- 
national economic  relations  until  he  clearly  understands  that 
the  cause  of  the  international  maladjustment,  including  the 
depreciated  exchanges,  has  been  too  much  buying  from  the 
United  States.  European  holdings  of  American  securities 
have  been  traded  for  American  goods;  European  gold  has 
flooded  the  United  States  in  exchange  for  American  goods ; 
and  other  billions  of  our  goods  have  been  shipped  abroad 
on  credit.  The  result  has  been  an  unbalancing  of  the 
economic  and  financial  equilibrium  of  the  world  on  a  scale 
that  no  one  before  the  war  would  have  conceived  possible.® 

'The  reader  will  do  well  to  refer  again  to  the  table  on  page  19, 
which  shows  the  extent  to  which  the  international  scale-pans  have  been 
unbalanced. 


LIMITATIONS  OF  FOREIGN  CREDITS  317 

The  remedy  for  this  malady  is  not  more  of  the  same 
medicine.  Additional  foreign  investments  by  the  United 
States  will  not  bring  the  exchanges  back  to  par ;  on  the  con- 
trary, it  will  depreciate  them  still  more.  Temporarily,  while 
exchange  is  being  purchased  for  the  purpose  of  making  in- 
vestments, exchange  quotations  may  rise;  but  shortly — 
when  interest  becomes  due — there  will  be  a  tendency  toward 
still  further  depreciation.  This  might  be,  theoretically,  off- 
set by  new  foreign  investments  the  year  following — invest- 
ments in  excess  of  the  interest  charges  on  the  old,  and  so  on 
indefinitely.  It  is  always  recognized,  however,  that  there 
must  shortly  come  a  time  when  our  new  investments  would 
be  less  in  volume  than  the  interest  on  the  old  investments. 
When  this  becomes  true,  the  net  effect  on  exchange  rates 
will  be  one  of  depression. 

So  much  for  theoretical  possibilities.  The  practical  sit- 
uation is  that  we  have  already  reached  a  point  where  new 
investments  are  not  equal  in  volume  to  the  interest  on  exist- 
ing foreign  debts.  The  only  reason  why  the  depressing 
effects  upon  the  exchanges  is  not  more  fully  manifest  is  that 
thus  far  we  have  not  been  asking  foreign  debtors  to  pay  us 
interest.  If  we  should  insist  upon  the  payment  of  interest 
on  the  foreign  debt,  European  exchanges  would  immediately 
suffer  heavy  depreciation.  In  the  words  of  George  E. 
Roberts  spoken  before  the  International  Chamber  of  Com- 
merce in  London : 

"If  in  the  present  state  of  trade  the  United  States  should 
ask  for  the  payment  of  accrued  interest  upon  these  loans  and 
the  debtor  governments  should  go  into  the  markets  and  at- 
tempt to  gather  up  exchange  to  make  the  payments,  the  ef- 
fect would  be  to  raise  exchange  rates  on  New  York  still  higher 
and  bring  our  foreign  trade  to  a  standstill.  In  short,  the 
United  States  cannot  afford  to  accept  payment  of  either  inter- 
est or  principal  from  the  debtor  governments  at  this  time." 


31 8  REMEDIES— PROPOSED  AND  REAL 

The  economic  rehabilitation  of  Europe  and  the  restora- 
tion of  international  trade  and  prosperity  is  not,  ultimately, 
to  be  secured  by  increasing  our  loans  to  Europe  from  14  to 
15,  to  16,  to  18,  and  to  20,  and  to  30  billions.  Such  a  develop- 
ment would  only  intensify  the  world  maladjustment  which 
we  are  seeking  to  correct.  All  this  is  not  to  say,  however, 
that  there  may  not  still  be  an  interval  of  time  during  which 
Europe  will  have  to  borrow  more.  She  may  perhaps  find 
it  necessary  to  go  somewhat  further  into  debt  before  she 
can  pull  herself  together  and  begin  the  process  of  getting 
out.  But  in  the  nature  of  things,  Europe  cannot  expect  to 
borrow  much  more.  The  several  billions  that  have  been 
borrowed  since  the  Armistice  have  not  placed  Europe  on  her 
feet;  on  the  contrary,  every  nation  in  Europe,  England  not 
excepted,  is  in  a  worse  financial  plight  today  than  it  was 
two  years  ago. 

It  is  possible — though  not  certain — that  conditions  might 
have  been  still  worse  if  we  had  not  extended  Europe  huge 
post-war  credits.  Be  this  as  it  may,  if  Europe  has  never- 
theless continued  to  go  backward,  the  argument  for  addi- 
tional credits  loses  all  point — except  as  viewed  from  the 
standpoint  of  humanitarian  considerations.  Certainly,  if 
some  additional  credits  are  to  be  granted,  there  must  be 
absolute  assurance  that  they  will  be  utilized  only  for  essen- 
tial purposes,  and  not  squandered  on  stupid  consumptive 
extravagance,  or  in  equally  stupid  military  adventures,  which 
only  serve  to  intensify  the  political  and  economic  instability 
of  Europe.  But  more  of  this  in  the  closing  chapter  of  the 
volume. 


CHAPTER  XX 

THE  STABILIZATION  OF  THE  INTERNATIONAL 
EXCHANGES 

Factors  Involved  in  Stabilization 

As  we  have  seen  in  the  chapter  devoted  to  the  foreign 
exchanges,  the  fluctuations  of  exchange  rates  is  one  of  the 
most  serious  obstacles  to  international  trade,  and  hence  to 
the  economic  recovery  of  the  world.  Ever  since  the  fall  and 
the  gyrations  in  exchange  rates  began  in  the  spring  of  1919, 
economists  and  financiers  have  advocated  stabilizing  ex- 
change rates.  The  need  for,  and  the  possibility  of,  stabiliz- 
ing exchange  rates  was  given  prominent  consideration  in 
the  Brussels  financial  conference  of  October,  1920.  It  was 
again  considered  at  the  meeting  of  the  International  Chamber 
of  Commerce  in  London  in  June,  192 1.  Stabilization  of 
exchanges  is  now  being  considered  in  the  Western  Hemi- 
sphere by  the  Inter-American  High  Commission.  It  has, 
moreover,  been  strongly  urged  that  there  should  be  held,  in 
conjunction  with  the  limitation  of  armaments  conference  in 
Washington,  an  international  conference  of  financiers  and 
economists  on  the  subject  of  stabilizing  the  international 
exchanges. 

In  brief,  the  thought  behind  the  stabilization  proposal 
is  this :  If  the  value  of  the  pound  sterling,  franc,  lira,  mark, 
etc.,  could  be  kept  from  fluctuating,  it  would  not  matter 
greatly  that  European  currencies  are  depreciated  as  com- 
pared with  the  dollar.  If  international  traders  could  depend 
upon  exchange  rates  remaining  for  a  reasonable  length  of 
time  at  a  given  level,  it  is  believed  that  international  trade 
would  be  revived  regardless  of  the  depreciation  of  the 

319 


320  REMEDIES— PROPOSED  AND  REAL 

various  European  moneys.  There  can,  in  fact,  be  no  ques- 
tion that  fluctuating  exchanges  enormously  increase  the  risks 
of  foreign  trade,  and  there  can  in  consequence  be  Httle  doubt 
that  a  stabiHzation  of  exchange  rates  would  prove  a  great 
boon  to  international  trade. 

It  should  be  understood  that  the  stabilizing  of  European 
exchanges  involves,  (i)  a  stabilization  of  the  value  of  the 
paper  mark,  paper  franc,  paper  pound  sterling,  etc.,  and 
(2)  a  stabilization  of  price  levels  within  the  several  European 
countries.  It  was  pointed  out  in  the  analysis  of  the  foreign 
exchange  micchanism  in  Chapter  II,  that  there  are  two 
reasons  for  the  depreciation  of  the  exchanges — the  unbal- 
anced international  trade  and  financial  situation,  and  the 
depreciation  of  the  paper  currencies  in  the  various  European 
countries  as  compared  with  gold.  If,  therefore,  the  paper 
currency  in  any  given  European  country  is  allowed  to 
increase,  as  has  continually  been  the  case  in  central  and 
eastern  Europe,  it  will  fall  in  value  as  compared  with  gold. 
On  the  other  hand,  if  the  paper  currency  within  any  Euro- 
pean country  is  allowed  to  decrease,  as  has  been  recently 
the  case  in  France  and  England,  its  value  will  rise  as 
compared  with  gold.  Thus  it  will  be  seen  that  it  is  a  first 
principle  that  stabilization  of  the  exchanges  depends  upon 
a  prior  definite  fixation  of  the  supply  of  paper  currency  and 
upon  the  stabilization  of  domestic  prices  in  the  several 
European  countries.  There  must  be  neither  inflation  nor 
deflation. 

Putting  the  Cart  before  the  Horse 

Now  it  is  because  of  this  principle,  first  of  all,  that 
stabilization  of  the  exchanges  is  an  impossibility.  That  is  to 
say,  it  is  impossible  to  begin  the  process  of  economic  re- 
organization that  is  conceded  to  be  necessary  by  stabilizing 
the  exchanges.     That  is  really  putting  the  cart  before  the 


STABILIZATION  OF  EXCHANGES  321 

horse.  Those  who  urge  the  stabiHzing  of  the  exchanges  as 
a  solution  of  the  world  problem  have  begun  at  the  wrong 
end.  Several  things  must  first  be  done  before  stabilization 
of  exchanges  can  be  accomplished;  and  when  these  things 
have  been  done  the  exchange  question  will  in  large  measure 
take  care  of  itself.    They  are  as  follows : 

I.  Exchanges  cannot  be  stabilized  until  European  bud- 
gets have  been  balanced.  We  need  merely  repeat  here  what 
has  been  shown  in  Part  I  of  this  volume/  namely,  that  so 
long  as  governments  do  not  raise  through  taxation  funds 
sufficient  to  meet  current  expenditures,  a  resort  to  the  print- 
ing press  is  inevitable.  And  when  further  issues  of  paper 
currency  are  made,  the  value  of  all  the  existing  currency 
falls  as  compared  with  gold;  and  hence  exchange  rates  fall 
as  compared  with  the  American  gold  dollar. 

It  will  be  recalled  in  this  connection  that  the  form  of 
inflation  which  results  from  government  deficits  has  ceased 
nowhere  on  the  continent  of  Europe;  and  that  the  recent 
decline  in  the  total  outstanding  volume  of  currency  in  France 
is  merely  due  to  the  fact  that  commercial  deflation  in  recent 
months  has  been  slightly  in  excess  of  the  continuing  fiscal 
inflation.  As  soon  as  commercial  deflation  ceases,  the  total 
quantity  of  currency  in  France,  for  example,  will  again  ex- 
pand in  consequence  of  the  unbalanced  budget  and  the  value 
of  the  paper  franc  will  again  fall  in  comparison  with  the 
value  of  gold.  ^  In  all  the  countries  of  central  and  eastern 
Europe,  as  we  have  seen,  fiscal  inflation  far  more  than 
counterbalances  the  deflating  tendencies  of  the  business  de- 
pression. In  consequence  the  quantity  of  outstanding  cur- 
rency continues  to  increase  by  leaps  and  bounds.  As  one 
writer  puts  it,  "Poland's  outstanding  note  issues  now  amount 


'  See  Chapter  X.  • 

'  For  a  consideration  of  other  items  affecting  French  exchange  rates. 


see  page  91. 
21 


322  REMEDIES— PROPOSED  AND  REAL 

to  lOO  billion  marks.  I  lost  track  of  Russian  rubles  at  85 
billions;  and  Poland  is  but  a  pocket-borough  as  compared 
with  Russia." 

Because  of  the  near  worthlessness  of  most  of  the  cur- 
rencies of  central  and  eastern  Europe,  those  who  favor 
stabilization  usually  insist  that  there  must  be  a  large  measure 
of  deflation  in  Germany,  Poland,  Austria,  Hungary,  etc., 
before  any  stabilization  program  should  be  undertaken.  The 
value  of  the  mark,  crown,  kopeck,  etc.,  should  be  raised 
materially  before  attempting  stabilization.  In  the  light  of 
these  suggestions  it  will  be  interesting  to  give  briefly  the 
results  of  one  or  two  attempts  at  deflation  that  have  already 
been  made. 

Czechoslovakia  undertook  in  the  spring  of  1919  to  deflate 
the  huge  volume  of  Austro-Hungarian  money  in  circulation, 
and  at  the  same  time  to  establish  a  national  currency  for  the 
newly  formed  nation.  The  frontier  was  closed  so  that  no 
outside  currency  could  come  into  the  country.  The  out- 
standing currency  was  then  called  in  by  the  government,  and 
50  per  cent  of  it  was  retained  by  the  government.  It  was 
to  be  retired  from  circulation.  For  the  remainder  the  gov- 
ernment issued  50-year  non-interest  bearing  government 
notes,  stamped  as  Czechoslovakian  money.  Within  a  very 
brief  time,  however,  it  was  found  necessary  for  the  govern- 
ment to  utilize  the  other  50  per  cent  to  defray  govern- 
ment expenses,  because  the  fiscal  budget  had  not  been 
balanced. 

In  1920  Hungary  called  in  its  entire  quantity  of  paper 
currency,  ostensibly  with  a  view  to  reducing  its  quantity. 
The  Minister  of  Foreign  Affairs  was,  however,  responsible 
for  the  statement  that  it  was  the  definite  expectation  that 
the  government  would  use  the  retained  portion  for  the  pur- 
pose of  defraying  government  expenses,  that  is,  in  meeting 
the  deficit.    He  added  that  the  amount  retained  would  suf- 


STABILIZATION  OF  EXCHANGES  323 

fice  for  about  three  months.^     This  expectation  has  been 
amply  fulfilled. 

2.  Stabilization  of  the  exchanges  cannot  be  effected  so 
long  as  European  trade  is  seriously  unbalanced.  One  cause 
of  exchange  depreciation,  as  we  have  seen,  is  the  unfavorable 
trade  balance  of  the  various  European  countries.  Fluctua- 
tions in  the  volume  of  trade  also  tend  to  cause  fluctuations 
in  exchange  rates.  Until  trade  between  nations  is  again  re- 
established on  something  like  a  normal  basis,  it  will  be 
impossible  to  prevent  fluctuation  in  exchange  rates. 

3.  So  long  as  international  financial  operations  are  out 
of  gear,  it  is  difficult  to  see  how  the  foreign  exchanges  can 
be  stabilized.  Concretely,  the  foreign  exchanges  cannot  be 
stabilized  so  long  as  European  countries  continue  to  increase 
their  indebtedness  to  the  United  States  through  the  medium 
of  foreign  loans,  whether  government  or  private.  Imme- 
diately speaking,  as  we  found  in  the  preceding  chapter,  an 
extension  of  credit  through  increasing  the  demand  for  bills 
of  exchange  raises  exchange  rates.  In  a  short  time,  how- 
ever, the  extension  of  additional  credits  tends  to  depress 
European  exchange  rates,  for  the  simple  reason  that  interest 
on  the  new  loans  shortly  must  be  added  to  the  burden  placed 
upon  Europe.  Exchange  rates  are  thus  alternately  bulled 
and  beared. 

4.  Foreign  exchange  rates  cannot  be  stabilized  so  long 
as  reparations  and  Allied  debts  are  required  to  be  paid.  As 
we  have  previously  seen,  the  payment  of  reparation  and 
debt  instalments  means  a  temporary  bulling  of  the  market, 
followed  by  a  slump,  which  gives  unusual  opportunities  for 
speculative  manipulations.  We  may  as  well  forget  about 
stabilizing  the  exchanges,  unless  reparation  and  Allied 
debts  are  canceled.    Unbalanced  and  unstable  financial  rela- 


'  The  statement  was  made  in  a  conversation  with  Mr.  Bass. 


324  REMEDIES— PROPOSED  AND  REAL 

tions   between   nations  are   incompatible   with   stable   ex- 
changes. 

Finally,  the  attempt  to  stabilize  the  exchanges  is  merely 
another  one  of  the  vain  efforts  to  find  some  one  simple  short- 
cut to  world  recovery.  The  very  suggestion  denotes  once 
more  the  current  failure  to  understand  the  unity  of  the  world 
economic  and  political  problem.  Each  link  in  the  chain  of 
economic  and  political  relations  supports  every  other.  Just 
as  unbalanced  trade  has  helped  to  depreciate  the  exchanges, 
and  as  the  depreciated  exchanges  in  turn  have  helped  to 
unbalance  trade;  just  as  unbalanced  budgets  have  served  to 
inflate  the  currencies,  and  in  turn  as  currency  inflation  has 
increased  the  budgetary  difficulties;  just  as  the  granting  of 
huge  loans  to  Europe  has  thrown  the  economic  balance  of 
the  world  out  of  gear,  and  as  the  attempt  of  European 
nations  to  pay  debts  and  indemnities  further  unsettles  inter- 
national trade  and  financial  relations — so  also  the  return  to 
international  economic  stability  depends  upon  manifold  fac- 
tors. Stabilization  of  the  foreign  exchanges  depends  upon 
stabilization  of  domestic  prices;  stabilization  of  domestic 
prices  depends  upon  controlling  paper  money  issues;  con- 
trolling paper  money  issues  depends  upon  the  balancing  of 
budgets;  and  the  balancing  of  budgets  depends  upon  both 
economic  and  political  stability  in  international  relations. 
All  these  elements  must  in  turn  contribute  to  the  re-estab- 
lishment of  domestic  production  and  to  balanced  interna- 
tional trade,  and  thus  to  the  desired  stabilization  of 
exchanges.  But  stabilization  of  the  exchanges  would  then 
already  be  an  accomplished  fact. 


CHAPTER  XXI 

THE  WAY  OUT 

Four  Basic  Requirements 

In  outlining  the  policies  that  must  be  pursued  by  nations 
if  recovery  from  the  effects  of  the  war  is  to  be  brought  about, 
we  shall  largely  build  upon  principles  that  have  already  been 
enunciated  and  elaborated  in  the  course  of  the  discussions 
in  preceding  chapters.  There  appear  to  be  four  basic  re- 
quirements in  the  situation,  four  things  that  must  be  accom- 
plished if  the  existing  processes  of  dissolution  are  to  be 
overcome  and  the  world  again  set  in  the  direction  of  eco- 
nomic and  social  progress.  First,  domestic  production  must 
be  increased  in  every  country.  Second,  relatively  unrestricted 
and  balanced  trade  between  nations  must  be  re-established. 
Third,  the  gold  standard  must  be  restored.  Fourth,  the 
budgets  of  European  countries  must  be  balanced — balanced 
in  the  sense  that  expenditures  do  not  exceed  receipts  from 
taxation.  We  do  not  mention  the  cessation  of  inflation  as 
a  separate  thing  to  be  accomplished,  for,  as  we  have  seen  in 
Chapter  VIII,  inflation  is  now  largely  a  result  of  unbalanced 
budgets.  These  are  the  four  outstanding  requirements;  it 
may  safely  be  said  that  if  these  four  things  are  secured,  the 
economic  world  as  a  whole  will  again  be  on  its  feet. 

I.     Domestic  Production  Must  Be  Increased 

Price  Readjustment 

An  increase  in  domestic  production  is  obviously  very 
intimately  related  to  the  restoration  of  international  trade. 
Nevertheless  there  are  certain  requirements  which  must  be 

325 


326  REMEDIES— PROPOSED  AND  REAL 

fulfilled  within  each  nation  independently  of  the  restoration 
of  foreign  trade.  If  productive  output  is  to  be  increased, 
something  more  is  necessary  than  a  change  in  the  attitude  of 
labor ;  something  more  is  necessary,  also,  than  the  mere  enun- 
ciation of  the  old  doctrine  that  what  we  must  do  is  to  work 
and  save.  Opportunity  to  work  and  to  save  is  now  both  in 
Europe  and  the  United  States  the  all-important  requirement. 

Any  discussion  of  domestic  production,  of  course,  raises 
immediately  the  problems  of  the  business  cycle.  If  produc- 
tion is  to  be  materially  increased,  somehow  the  back  of  the 
depression  must  be  broken  and  the  wheels  of  industry  must 
again  be  set  in  motion.  In  Chapter  IX,  "How  Long  Will 
the  Depression  Endure,"  especial  emphasis  was  laid  upon 
the  maladjustment  in  prices  that  now  exists  as  between  the 
various  groups  of  commodities.  It  will  be  recalled  that 
agricultural  prices  at  the  farms  are  now  in  general  at  prac- 
tically pre-war  levels ;  and  that,  on  the  other  hand,  the  prices 
of  many  important  groups  of  commodities  are  still  far  above 
pre-war  levels.  If  the  conclusion  in  Chapter  IX  is  sound, 
namely,  that  there  cannot  be  a  real  revival  of  industrial 
prosperity  until  such  time  as  agricultural  purchasing  power 
is  restored,  then  the  first  step  in  any  program  for  re-estab- 
lishing the  fundamental  conditions  of  prosperity  must  be  a 
reduction  in  the  prices  of  those  groups  of  commodities  which 
have  thus  far  declined  relatively  little. 

If  it  be  objected  that  in  view  of  costs  of  production  such 
commodities  cannot  be  reduced  in  price,  it  is  answered  that 
what  has  occurred  in  other  groups  of  commodities  can  occur 
in  these  commodities;  indeed,  it  must  occur  before  pros- 
perity can  again  be  resumed.  However  painful  the  process, 
liquidation  must  run  its  course  in  the  lines  where  it  has  not 
yet  occurred.  There  is,  moreover,  nothing  to  be  gained  by 
unduly  slowing  down  the  process  of  liquidation.  The  sooner 
it  occurs,  the  sooner  will  the  necessary  foundation  be  laid 


THE  WAY  OUT  327 

for  a  resumption  of  industrial  activity.  It  may  be  noted  that 
the  process  involves  a  further  liquidation  of  labor  in  nu- 
merous industries,  as  well  as  a  reduction  of  transportation 
rates.  These  reductions,  moreover,  must  be  passed  through 
to  the  final  consumer  in  the  form  of  lower  retail  prices. 

Supplying  the  Initial  Stimulus 

After  prices  and  costs  have  been  reduced  in  the  lines 
that  have  thus  far  resisted  the  forces  of  liquidation  and  a 
rough  price  equilibrium  has  been  established,  then  some 
stimulus  must,  if  possible,  be  applied  that  will  give  the  stalled 
industrial  machine  the  necessary  initial  whirl  that  leads  to 
general  business  resumption.  In  this  connection,  the  inaugu- 
ration of  a  program  of  public  works  by  federal,  state,  and 
municipal  agencies  appears  to  be  much  the  most  feasible 
means.  The  demand  for  materials  thus  created  would  stimu- 
late certain  lines  of  activity;  and  in  turn  the  workers  thus 
given  employment  would,  through  purchases  at  the  retail 
stores,  stimulate  a  demand  for  commodities  generally. 

It  should  be  distinctly  understood,  however,  that  no 
program  of  public  works  will  suffice  to  bring  a  complete 
resumption  of  business  activity  so  long  as  the  whole  interna- 
tional situation  remains  in  chaos.  What  we  are  suggesting 
here  is  but  one  of  several  necessary  steps  in  any  program  of 
world  economic  recuperation.  Without  a  restoration  of  in- 
ternational trade  and  without  a  balancing  of  budgets  in 
European  countries,  the  stimulation  of  public  works  will 
accomplish  relatively  little. 

II.     Balanced  International  Trade 

Economic  Argument  for  Cancellation  of  Allied  Debts 

We  have  seen  in  Chapter  XI  that  the  modern  world  is  an 
economic  unit  and  that  there  can  be  no  genuine  prosperity 


328  REMEDIES— PROPOSED  AND  REAL 

an)nvhere  so  long  as  any  important  section  of  the  world  is 
economically  and  socially  disintegrating.  We  have  seen  that 
the  restoration  of  productive  activities  in  the  United  States 
is  in  large  measure  dependent  upon  the  restoration  of  Euro- 
pean buying  power.  We  have  found  in  Chapter  XV,  "The 
Economics  of  the  Reparations  Problem,"  that  balanced 
trade  is  fundamental  to  the  successful  operation  of  the  mod- 
ern system  of  specialized  production  and  exchange  between 
nations.  We  have  seen  in  Chapter  XIX,  "The  Limitations 
of  Foreign  Credits,"  that  a  restoration  of  international 
equilibrium  is  not  in  the  long  run  to  be  attained  through 
piling  up  further  European  debts  to  the  United  States.  If 
Europe  is  to  revive  and  if  the  international  financial  system 
is  again  to  be  brought  into  normal  adjustment,  European 
exports  must  be  expanded  relatively  to  imports.  These 
principles  lead  inevitably  to  the  conclusion  that  European 
government  debts  to  the  United  States  government  should  be 
canceled.  The  matter  of  European  obligations  to  private 
individuals  in  the  United  States  involves  somewhat  different 
considerations  and  will  be  discussed  later. 

It  is  good  business  for  the  United  States  to  cancel  Euro- 
pean debts.  The  issues  involved  have  been  fully  set  forth 
in  a  preceding  chapter,  but  for  the  sake  of  emphasis  they 
may  be  restated  here.  There  are  three  ways  of  looking  at 
the  problem : 

First,  let  us  assume  that  Europe  buys  as  usual  from 
us,  but  exports  to  us  the  usual  amounts  plus  the  amount 
of  indebtedness.  This  would  seriously  disorganize  our 
domestic  industries.  Ultimately — after  a  period  of  severe 
business  depression — the  labor  and  capital  employed  in 
the  disrupted  industries  might  find  occupation  elsewhere. 
But  by  the  time  approximately  such  readjustment  was  ef- 
fected, another  readjustment  equally  disturbing  would  be 
required,  that  is,  upon  the  conclusion  of  the  debt  payments. 


THE  WAY  OUT  329 

Second,  let  us  assume  that  Europe  cannot  increase  her 
exports  to  us  by  the  amount  of  the  indebtedness  and  must  in 
consequence  utilize  existing  exports  for  debt  payments.  In 
view  of  European  economic  conditions  this  is  undoubtedly 
what  will  have  to  occur  if  we  insist  upon  payment.  This  will 
mean,  however,  that  European  imports  from  the  United 
States  will  be  curtailed  to  the  extent  that  European  exports 
are  commandeered  for  debt  payments.  Concretely,  if 
Europe  ships  us  $1,000,000,000  of  goods  annually  as  pay- 
ment of  interests  and  principal  on  past  debts,  she  will  be 
unable  to  buy  from  us  $1,000,000,000  of  commodities  of 
current  production.  We  shall  have  to  take  our  choice  be- 
tween allowing  Europe  to  ship  us  goods  in  payment  of  past 
obligations  or  allowing  her  to  use  such  goods  in  purchasing 
future  American  exports.  ^  We  want  a  restoration  of 
balanced  trade.  There  can  be  no  genuine  recovery  of  busi- 
ness until  normal  trade  relations  are  re-established;  and 
normal  trade  relations  cannot  be  re-established  so  long  as 
wholly  abnormal  international  debt  payments  are  insisted 
upon. 

Third,  let  us  assume  that  through  the  exercise  of  the 
enormous  power  and  influence  which  we  now  possess  in  the 
world,  we  should  bring  sufficient  pressure  to  bear  to  compel 
Europe  to  make  Herculean  efforts  to  pay.  Under  present  or 
early  prospective  conditions  we  will  merely  be  compelling 
European  nations  to  resort  to  further  domestic  inflation,  and 
thus  still  further  disrupt  European  currencies  and  exchanges, 
even  as  German  currency  and  exchange  has  succumbed  under 
the  recent  pressure  of  the  Allies  for  reparation  payments. 
The  resultant  effects  upon  American  trade  and  industry  are 
so  obvious,  in  the  light  of  preceding  discussions,  as  to  require 
no  discussion  here. 


*For  the  eflFects  upon  the  American  tax  burden,  see  pages  234-337. 


330  REMEDIES— PROPOSED  AND  REAL 

Moral  Reasons 

There  is,  moreover,  another  reason  why  we  should  can- 
cel the  greater  part  of  the  Allied  indebtedness.  By  so  doing 
we  can  both  regain  our  traditional  reputation  for  fair  deal- 
ing, and  promote  a  new  spirit  of  co-operation  in  the  solu- 
tion of  world  problems.  The  truth  is  that  the  greater  part 
of  the  European  debt  was  contracted  between  the  date  of  our 
entrance  into  the  war  and  Armistic  Day.  Unable  imme- 
diately to  place  large  armies  in  the  field,  we  were  neverthe- 
less equipped  to  furnish  the  supplies  and  munitions  of  war, 
without  which  the  Allied  armies  must  have  succumbed  be- 
fore American  man  power  could  have  been  placed  in  the 
field.  Every  consideration  of  fairness  and  square  dealing 
requires  that  we  count  these  loans  as  a  part  of  our  contri- 
bution to  the  war.  There  is  no  more  reason  why  we  should 
charge  the  Allies  for  the  materials  and  supplies  required 
than  for  the  cost  of  our  army,  or  for  the  loss  of  our  men 
after  they  actually  got  into  the  field — unless,  indeed,  we  prize 
our  dollars  more  than  we  do  our  flesh  and  blood. 

Additional  light  is  thrown  upon  the  ethical  issues  in- 
volved, by  the  fact  that  even  before  our  entrance  into  the 
war  and  the  granting  of  official  loans  by  the  United  States 
government,  Europe  had  parted  with  roughly  a  billion  dol- 
lars' worth  of  gold  in  purchase  of  American  goods,  had 
resold  several  billion  dollars'  worth  of  American  securities 
to  the  United  States  as  a  means  of  purchasing  munitions 
and  supplies,  and  had  contracted  huge  loans  in  the  United 
States  through  the  ordinary  private  financial  channels. 
Whatever  the  merits  of  the  controversy  as  to  when,  pre- 
cisely, it  became  our  official  duty — or  when  it  became  politi- 
cally possible — to  enter  the  war,  the  fundamental  fact 
cannot  be  ignored  that  at  least  from  the  time  of  the  sinking 
of  the  Lusitania  on,  the  war  was  America's  concern.  The 
truth  is  that  Europe  had  utilized  practically  all  of  her  avail- 


THE  WAY  OUT  33 1 

able  resources  in  purchasing  supplies  in  the  United  States 
before  the  United  States  officially  entered  the  war.  From 
then  on,  the  only  possible  means  of  procuring  requisite  mate- 
rials was  through  borrowing.  The  war  would  have  been 
lost  if  we  had  not  furnished  what  was  needed.  There  is 
not  the  slightest  justification  now  for  us  to  insist  that  these 
are  real  obligations  of  Europe  to  the  United  States. 

It  should  be  emphasized,  lest  there  be  misunderstanding, 
that  this  moral  argument  applies  only  to  that  portion  of  the 
ten  billions  of  government  debt  which  was  incurred  for 
strictly  military  purposes.  It  would  not  be  particularly  dif- 
ficult to  differentiate  between  war  and  non-war  loans  before 
the  Armistice.  Since  the  Armistice,  of  course,  none  of  the 
loans  made  were  for  war  purposes.  A  rough  estimate  of 
the  total  of  war  loans  is  seven  or  eight  billion  dollars. 

Private  versus  Public  Creditors 

Debts  of  European  governments  and  European  individ- 
uals to  private  individuals  in  the  United  States  stand  in  a 
very  different  light.  While  from  the  standpoint  of  inter- 
national trade  the  problem  is  practically  identical  with  the 
question  of  government  debts,  from  the  standpoint  of  moral 
obligations  and  the  future  of  foreign  credits  it  is  essentially 
different.  If  the  claims  of  American  business  men  against 
European  governments  and  European  corporations  were 
to  be  annulled,  the  effects  upon  future  credit  operations 
might  prove  most  detrimental.  We  believe  that  the  recom- 
mendation the  United  States  Chamber  of  Commerce  made 
at  the  International  Chamber  of  Commerce  meeting  in  Lon- 
don, to  the  effect  that  international  debt  obligations  should 
be  maintained  because  of  the  necessity  in  these  unsettled 
times  of  adhering  steadfastly  to  the  sanctity  of  contracts, 
is  sound  so  far  as  it  relates  to  private  obligations.  The  can- 
cellation of  European  government  debts  upon  our  own  initia- 


332  REMEDIES— PROPOSED  AND  REAL 

tive  would,  however,  in  no  sense  be  repudiation.  In  the  first 
place,  it  would  be  in  response  to  the  voluntary  suggestion 
of  the  creditor ;  and  in  the  second  place,  it  would  be  in  recog- 
nition of  the  fact  that  we  have  no  good  moral  claim  for 
goods  delivered  during  the  war. 

Moreover,  we  do  not  believe  that  there  is  anything  in 
the  contention  that  if  we  now  annul  the  government  debts 
incurred  during  the  recent  war,  in  the  event  of  another  war 
the  United  States  would  be  unwilling  to  furnish  the  credits 
then  required.  While  this  argument  may  be  sound  as  ap- 
plied to  private  credit,  it  cannot  be  taken  seriously  with 
reference  to  government  credits.  If  the  United  States  were 
again  menaced  by  German,  or  other  aggression,  and  if  we 
were  compelled  to  enter  another  war  in  defense  of  our 
national  rights,  not  to  mention  democracy,  there  need  be  no 
fear  that  we  should  refuse  to  furnish  the  military  supplies 
and  munitions  required  by  our  Allies  as  well  as  by  ourselves. 
The  only  possible  difference  would  be  that  the  next  time  we 
should  not  call  it  a  debt  which  our  fellows  in  arms  owe  to 
us. 

New  Reparations  Settlement  Required 

The  same  general  conclusion  is  applicable  with  reference 
to  reparations.  If  recovery  of  world  trade  and  a  return  to 
prosperity  is  desired,  a  complete  change  of  front  on  the 
part  of  the  Allied  nations  with  reference  to  reparations  is 
necessary.  We  have  seen  that  it  is  impossible  for  the  Allies 
to  obtain  reparation  money  with  which  to  defray  pensions, 
etc. ;  we  have  seen  that  the  only  way  in  which  any  substantial 
volume  of  reparations  can  possibly  be  paid  is  through  the 
export  of  goods  into  Allied  countries. 

The  present  absurd  method  of  figuring  reparations  in 
terms  of  money  should  be  given  up.  Germany  cannot  pay 
in  gold,  or  other  money,  and  the  sooner  this  is  openly  recog- 


THE  WAY  OUT  333 

nized  by  the  governments  of  the  world,  the  better.  Each 
nation  should  designate  precisely  what  commodities  it  wishes 
Germany  to  deliver  and  in  what  volume  it  is  willing  to  re- 
ceive the  commodities  designated.  We  have  seen  that  in 
the  Rathenau-Loucheur  agreement  France  has  finally  drawn 
up  a  statement  of  specific  commodities  that  she  is  willing  to 
receive — or  more  accurately  speaking,  that  the  reparation 
experts  think  France  is  willing  to  receive.^  Whatever  may 
be  true  of  reparation  adjustments  which  are  already  in 
process,  in  the  long  run  payments  in  kind  should  constitute 
all  the  French  reparations.  Any  other  means  of  payment, 
as  we  have  seen  in  our  previous  analysis,  is  either  altogether 
mythical  or  else  at  the  direct  expense  of  the  other  Allies. 
Meanwhile  if  England  can  think  of  any  commodities  that 
she  desires  to  have  shipped  in  from  Germany  free  of  charge, 
she  should  draw  up  a  bill  of  particulars;  and  the  same,  of 
course,  holds  for  Belgium,  Italy,  Serbia,  and  Roumania, 
Since  Germany  can  pay  only  with  goods,  the  total  of  goods 
actually  desired  by  Allied  nations  should  constitute  the  maxi- 
mum demands  made  upon  Germany.  Any  additional  money 
demands  are,  under  present  conditions,  a  mere  travesty  on 
human  intelligence. 

Moreover,  in  deciding  upon  the  amount  of  commodities 
which  they  desire  Germany  to  furnish  as  reparations,  the 
Allies  should  bear  in  mind  two  all-important  considerations. 
Assuming  France  might  be  willing  to  receive,  during  the 
next  three  years,  materials,  supplies,  etc.,  valued  at,  say, 
7  billion  marks,  it  does  not  at  all  follow  that  it  would  be  to 
the  best  interests  of  France  to  compel  Germany  to  furnish 
such  a  total.  In  the  first  place,  if  the  strain  thereby  placed 
upon  Germany  resulted  in  the  breakdown  of  the  German 
financial  and  economic  system,  the  disastrous  effects  upon 


'It  remains  to  be  seen,  it  will  be  recalled,  whether  the  French  Par- 
liament will  sanction  the  proposal.     See  discussion  in  Chapter  XVI. 


334  REMEDIES— PROPOSED  AND  REAL 

French  industry  would  far  more  than  outweigh  any  possible 
attending  gains  to  France.  In  the  second  place,  even  if 
the  German  economic  system  did  not  succumb  under  the 
strain,  one  must  still  appreciate,  if  he  is  to  appraise  correctly 
the  effect  of  reparation  payments,  that  when  Germany  is 
compelled  to  export  goods  to  France  or  other  countries  in 
settlement  of  reparation  obligations,  she  is  prevented  from 
using  those  commodities  in  buying  the  exports  of  France 
and  other  countries.  France  and  Britain  and  Belgium  and 
Italy  and  Serbia  and  Roumania  need  to  have  Germany  buy 
from  them  quite  as  much  as  they  need  to  have  German  mate- 
rials furnished  free  of  charge.  And  from  the  point  of  view 
of  European  industry  and  trade  as  a  whole,  there  cannot 
be  the  slightest  doubt  that  specialized  production  within  the 
various  countries  and  a  balanced  exchange  of  commodities 
between  nations  is  the  paramount  requirement  for  every 
nation  involved.  A  recognition  of  the  importance  to  every 
nation  of  German  markets  and  of  the  necessity  of  enabling 
Germany  to  use  her  own  exports  as  a  means  of  purchasing 
imports,  if  German  markets  are  to  be  restored,  leads  inevi- 
tably to  the  conclusion  that  reparation  payments  must  be 
reduced  to  negligible  quantities  for  the  good  of  the  Allied 
nations  themselves. 

Campaign  of  Enlightenment  Necessary 

What  hope  is  there  for  economic  recovery  in  the  world 
so  long  as  the  Treaty  of  Peace  and  the  settlements  made 
thereunder  stipulate,  on  the  one  hand,  that  the  "hole  in  the 
west"  must  be  kept  open,  that  Germany  must  not  reduce  her 
imports  of  non-essential  or  other  commodities;  and,  on  the 
other  hand,  require  that  Germany  must  use  all  the  possible 
exports  that  she  can  deliver  as  a  means  of  paying  repara- 
tions rather  than  as  means  of  buying  the  goods  which  Allied 
nations  are  so  desirous  of  selling?    What  hope  is  there  for 


THE  WAY  OUT  335 

the  world  so  long  as  the  leading  premiers  of  Allied  countries 
admit  that  Germany  can  pay  only  with  goods  which  none 
of  the  Allied  nations  are  willing  to  receive,  and  give  support 
to  their  parliaments  in  framing  tariff  measures  designed  to 
prevent  German  exports;  and  at  the  same  time  insist  that 
recalcitrant  Germany  must  meet  the  reparation  obligation 
to  the  last  farthing  and  the  last  sou?  What  hope  is  there 
for  the  world  so  long  as  most  of  the  leading  students  of  in- 
ternational finance  and  economics,  who  recognize  the  funda- 
mental illusion  in  reparations  and  Allied  debts,  will  frankly 
discuss  the  subject  only  in  undertones  and  in  inner  offices? 
What  hope  is  there  for  the  world  when  statesmen  and  finan- 
ciers alike,  while  lacking  the  courage  to  tell  the  truth  about 
reparations  and  inter-Allied  debts,  insist  that  nothing  can 
be  done  as  a  practical  matter,  "however  desirous  it  might 
be  from  an  economic  point  of  view,"  because  the  people  will 
not  be  satisfied  to  give  up  the  supposed  advantages  of 
reparations  and  of  debt  payments?  If  ever  there  was  a 
time  for  leadership  in  a  campaign  of  enlightenment  on  the 
fundamentals  of  international  economics,  it  is  now.  If  ever 
there  was  a  time  when  the  truth  is  needed  to  set  men  free, 
it  is  now.  If  ever  there  was  a  time  when  evasion,  conceal- 
ment, and  pussy-footing  were  political  virtues,  it  is  not  now. 

Trade  Barriers 

Quite  as  important  as  the  cancellation  of  huge  debts 
and  indemnities,  is  the  elimination  of  trade  barriers  in  order 
to  permit  a  resumption  of  normal  buying  and  selling  be- 
tween nations.  The  world  wants  trade,  with  emphasis  on 
the  trade — imports  as  well  as  exports.  If  the  statesmen  of 
the  world  do  not  by  this  time  realize  that  the  world  as  a 
whole  cannot  export  more  than  it  imports,  and  that  no  na- 
tion can  continue  to  export  unless  it  imports  goods  of  ap- 
proximately the  same  value,  then  there  can  be  no  hope  for 


336  REMEDIES— PROPOSED  AND  REAL 

extensive  trade  resumption.  Protection  may  be  all  right  in 
theory ;  but  it  will  not  work  in  practice,  as  the  last  two  years 
have  conclusively  demonstrated.  Economically  speaking, 
the  world  needs,  more  than  anything  else,  the  resumption 
of  specialized  production  in  accordance  with  the  varying 
capacities  of  nations  and  the  unrestricted  exchange  of  com- 
modities between  countries. 

There  has  been  since  the  war  a  return  to  a  regime  of 
trade  control  and  tariff  regulation  comparable  only  to  the 
situation  during  the  mercantilist  era  of  the  seventeenth  and 
eighteenth  centuries.  Then  the  guiding  principle  of  all  na- 
tions was  to  develop  national  power  through  a  series  of 
trade  regulations  and  restrictions  designed  to  promote  manu- 
facturing and  to  make  the  exports  of  every  nation  exceed 
the  imports,  with  a  consequent  perpetual  inflow  of  specie. 
The  new  mercantilism  is  in  some  degree  directly  attributable 
to  the  terms  of  the  peace  treaties.  For  example,  the 
treaties  provided  for  the  establishment  of  numerous  and  sun- 
dry new  nations  in  central  and  eastern  Europe.  In  the 
formation  of  these  new  nations  the  peace  conferees  sought 
the  advice  of  historians,  with  much  knowledge  of  emotional 
history  reaching  back  to  the  Middle  Ages,  but  with  practi- 
cally no  understanding  of  the  modern  economic  interdepen- 
dence of  nations.  Each  of  these  states  has  since  been  try- 
ing to  render  itself  economically  self-sufficient — through 
trade  embargoes,  restrictions,  and  tariffs ;  each  has,  however, 
merely  succeeded  in  rendering  itself  economically  impotent. 

Says  the  British  Commercial  Commissioner  to  Hungary : 
"The  conviction  is  indelibly  printed  in  one's  mind  that 
the  sole  possibility  of  the  States  arising  out  of  the  former 
Austro-Hungarian  Empire  regaining  anything  approaching 
their  former  stability  and  becoming  of  use  to  the  rest  of 
Europe  is  for  them  to  work  together  in  some  form  or  other. 
It  is  impossible  for  them  to  continue  to  be  close  preserves 


THE  WAY  OUT  337 

and  prosper ;  they  are  dependent  on  one  another.  The  trade 
barriers  which  have  been  set  up  on  all  sides  will  have  to  be 
removed.  In  surveying  the  past  year,  it  would  seeni  that 
each  State  has  determined  to  prevent  the  others  from  exist- 
ing, even  if  it  ruined  itself  in  the  endeavor."  ^ 

It  is  not  merely  trade  barriers  that  impede  economic 
recovery  in  central  and  eastern  Europe;  transport  barriers 
are  almost  as  bad.  Through  freight  lines  have  been  broken 
up;  trains  are  unloaded  at  the  boundaries  and  the  goods 
transshipped  at  great  expense,  partly  as  a  device  for  making 
work,  partly  as  a  means  of  obtaining  enlarged  customs 
revenues,  partly  through  fear  that  if  cars  were  allowed  to 
cross  the  frontier  they  would  never  be  seen  again,  and  partly 
from  mere  bureaucratic  stupidity.  An  excellent  example 
of  the  last  named  is  found  in  the  recent  refusal  to  allow  a 
fire  engine  to  cross  the  Austrian  frontier  into  Italy  to  extin- 
guish a  blaze  in  a  railway  depot,  for  the  reason  that  the  fire 
company  had  no  passports.    The  station  was  burned. 

The  nations  of  western  Europe,  Australia,  and  the 
United  States  have  been  following  similar  trade  policies. 
Emergency  and  anti-dumping  bills  are  advanced  to  prevent 
the  destruction  of  domestic  industries  threatened  by  the 
payment  of  debts  and  reparations,  when  what  is  really  re- 
quired is  the  stimulation  of  domestic  industries  through  a 
restoration  of  balanced  trade  between  nations.  We  do  not 
urge  that  absolute  free  trade  between  nations  should  immedi- 
ately be  established.  But  we  do  insist  that  the  erecting  of 
additional  tariff  barriers  and  trade  restrictions  at  this  time 
would  result  disastrously  to  the  industries  of  all  countries, 
and  that  gradual  reductions  of  duties  everywhere  would  be 
enormously  beneficial  to  all  concerned. 

There  is  a  growing  appreciation  among  the  more  en- 


'  R.  J.  E.  Humphreys,  in  Board  of  Trade  Journal,  June  9,   1921, 
page  638. 


338  REMEDIES— PROPOSED  AND  REAL, 

lightened  business  men  of  this  country  that  protectionism 
has  gone  to  seed.  Witness  the  vehement  protest  from 
bankers,  merchants,  and  even  from  many  manufacturers 
against  the  American  Valuation  Plan,  designed  to  bar  for- 
eign goods.  It  is  increasingly  recognized  that  if  we  expect 
to  export,  we  must  import. 

Special  Privileges  in  Foreign  Trade 

The  same  forces  that  have  been  responsible  for  the  crea- 
tion of  tariff  barriers  have  impelled  governments  to  lend 
their  support  to  large  industrial  and  trading  combinations 
seeking  the  control  of  foreign  markets.  The  more  powerful 
nations  are  compelling  the  weaker  ones  to  grant  by  treaty 
certain  monopolies  and  special  privileges  within  their  terri- 
tories. An  instance  is  found  in  the  recent  treaty  between 
France  and  Poland  under  which  Poland  has  agreed  to  give 
France  exclusive  mining  rights  and  special  tariff  privileges. 
Against  this  pact  the  United  States  has  entered  an  official 
protest.  There  are  a  large  number  of  such  international 
agreements  in  Europe  by  which  special  advantages  are  given 
to  one  nation  or  another.  This  tendency  to  eliminate  equal 
opportunity,  or  the  "open  door,"  in  international  commerce, 
receives  additional  impetus  through  the  organization  of  big 
business  combinations  or  trusts  which  have  grown  up  dur- 
ing and  since  the  war. 

An  example  of  the  union  of  government  and  business 
is  found  in  the  support  given  by  the  British  government  to 
the  efforts  of  the  Shell  Company  at  world  monopoly.  The 
government  is  financially  interested  in  subsidiary  companies 
of  this  oil  monopoly,  which  possesses  properties  and  exclu- 
sive rights  in  many  foreign  countries.  The  Shell  Company 
has  secured  control  of  the  Royal  Dutch  Company  and  seems 
to  have  thus  got  a  monopoly  in  the  Dutch  colonies.  At 
the  political  conference  held  in   San  Remo  in   1920,  the 


THE  WAY  OUT  339 

French  Prime  Minister  ceded  to  Great  Britain  the  oil  fields 
of  Mosul,  which  are  located  in  the  territory  claimed  by  the 
French  under  the  peace  settlement.  Additional  grants  were 
made  to  the  British  of  exploitation  rights  in  Madagascar 
and  Morocco.  All  these  monopoly  grants,  it  appears,  are 
now  controlled  by  the  British  Shell  Company.  The  British 
government,  moreover,  has  secured  by  treaty  from  Persia 
the  exclusive  rights  for  developing  the  oil  fields  of  that  coun- 
try. The  Persian  Oil  Company  which  the  government 
helped  to  finance  has  also,  it  seems,  been  absorbed  by  the 
trust.  Finally,  there  is  an  agreement  between  the  French 
and  British  regarding  the  oil  fields  of  Galicia,  the  details  of 
which  have  not  yet  been  published;  and  it  is  reported  that 
the  British  Shell  Company  has  also  secured  practical  control 
of  the  Roumanian  oil  fields.  Such  methods  of  conducting 
international  commerce  are  a  menace  to  the  future  peace  of 
the  world.  They  must  be  abandoned,  to  make  place  for 
equal  individual  trade  opportunity  regardless  of  nationality. 
It  will  be  seen  that  these  attempts  to  expand  exports 
through  lending  government  financial  support  to  huge  ex- 
porting corporations  are  diametrically  opposed  to  the  pol- 
icy of  restricting  imports  through  the  imposition  of  tariflf 
barriers.  What  a  tragedy  it  is  that  most  leading  govern- 
ments of  the  world  are  seeking  simultaneously  to  expand 
exports  by  granting  special  monopolistic  privileges  and  to 
reduce  imports  through  restrictive  tariff  legislation!  Mil- 
lions of  people  are  already  paying,  in  unemployment  and 
starvation,  the  penalty  of  this  stupidity. 

Further  Credit  Extensions 

In  Chapter  XIX,  "The  Limitations  of  Foreign  Credits," 
it  was  pointed  out  that  the  solution  of  the  European  problem 
does  not  lie  in  huge  additional  American  loans.  Further 
extensions  of  credit  to  Europe  merely  tend  to  increase  the 


340  REMEDIES— PROPOSED  AND  REAL 

international  maladjustment  which  we  are  seeking  to 
remedy.  It  was  admitted,  however,  that  the  economic 
plight  of  Europe  has  become  so  desperate  that  some  further 
credits  may  for  a  time  be  needed  by  certain  countries. 

Further  foreign  loans  must,  however,  be  granted  on 
essentially  different  terms  than  has  been  the  case  heretofore. 
We  have  already  extended  several  billions  of  credit  to  Europe 
since  the  war,  very  little  of  which  has  been  devoted  to  genu- 
ine reconstructive  work.  We  have  made  loans  to  France, 
for  example,  while  France  was  using  her  money  to  finance 
Polish  military  adventures.  For  that  matter  the  United 
States  has  also  furnished  Poland  munitions  on  credit.  We 
have,  moreover,  extended  credits  everywhere  for  relatively 
non-essential  uses.  Loans  for  such  purposes  must  be  sum- 
marily discontinued. 

It  is  idle,  moreover,  to  grant  loans  to  any  particular  in- 
dividual or  corporation  in  any  given  country,  if  the  financial 
and  economic  condition  of  that  country  is  fundamentally 
unsound.  Hauser  in  Vienna  or  Jabiski  in  Prague  may  be 
ever  so  trustworthy  and  of  first-rate  business  ability;  but  if 
governments  become  insolvent,  and  the  financial  and  econo- 
mic system  disintegrates,  the  credit  of  individuals  is  worth- 
less. It  is  equally  fruitless  to  extend  credits  for  the  financial 
rehabilitation  of  Poland,  or  Austria,  or  Roumania,  or  any 
other  isolated  country.  If  countries  roundabout  Austria 
collapse,  all  the  credits  in  the  world  cannot  prevent  Austria 
from  traveling  a  similar  road.  Europe,  at  least  continental 
Europe,  must  be  envisaged  as  a  credit  unit  if  further  loans 
are  to  be  either  safe  or  beneficial. 

III.     The  Gold  Standard  Must  Be  Restorep 

Effects  of  Depreciation 

Before  European  and  hence  world  economic  prosperity 
can  be  restored,  there  must  be  a  re-establishment  of  the  gold 


THE  WAY  OUT  341 

Standard  in  at  least  all  of  the  leading  commercial  nations  of 
the  world.  As  we  found  in  Chapter  VI,  every  nation  in 
Europe  was  forced  during  the  war  to  abandon  the  gold 
standard,  that  is  to  say,  it  was  forced  to  give  up  specie  re- 
demption of  paper  currency  upon  demand.  All  European 
nations  without  exception  are  still  on  the  paper  money  basis, 
and  with  few  exceptions  the  paper  currency  is  now  depre- 
ciated much  more  than  it  was  even  during  the  war  period. 
The  results  of  this  depreciation  of  paper  currency  are  mani- 
fested in  fluctuating  prices,  hesitant  business,  and  labor  and 
social  unrest  in  every  country;  while  in  some  countries  the 
steady  monetary  deterioration  is  causing  a  rapid  disintegra- 
tion of  the  entire  economic  system.  Moreover,  European 
paper  currency,  with  its  fluctuating  value,  is  a  primary  fac- 
tor in  the  oscillations  of  the  exchanges  which  so  disorganize 
international  trading  operations.  There  can  be  no  real 
stability  in  domestic  business  within  the  several  European 
countries,  and  no  stability  in  international  trade  and  finance, 
until  the  redeemability  of  paper  currency  in  gold  is  once 
more  re-established.  Interchangeability  of  gold  and  paper 
currency  is  necessary. 

Repudiation  Lesser  of  Evils 

Suggestions  have  been  made  by  many  people  since  the 
war  that  the  gold  standard  should  be  permanently  given  up 
and  that  some  substitute  should  be  found.  There  have  been 
suggestions  of  paper  units  of  value,  of  other  commodity 
units  of  value,  of  labor  value  units;  and  many  there  are  who 
believe  that  money  should  be  abolished  altogether,  and  that 
we  should  return  to  the  good  old  days  of  barter.  Attempts 
to  return  to  a  form  of  barter  in  international  trade  have 
in  fact  been  made;  but  they  have  not  proved  successful. 
The  other  suggestions,  moreover,  are  altogether  visionary. 
The  only  practical  way  out  of  the  present  monetary  chaos  is 


342  REMEDIES— PROPOSED  AND  REAL 

to  effect  a  return  to  the  gold  standard — not  because  the  gold 
standard  is  perfect,  but  because  it  offers  the  only  hope  for 
reasonable  financial  stability. 

The  gold  standard  cannot  be  re-established  in  most  of 
the  nations  east  of  the  Rhine,  including  Germany,  Austria, 
Hungary,  Poland,  Russia,  and  the  Balkan  states,  by  any 
normal  process  of  deflation  or  reduction  of  the  outstanding 
paper  issues.  The  difficulties  involved  in  retracing  the  finan- 
cial footsteps  that  have  led  from  the  gold  standard  to  the 
present  inflated  condition  have  already  been  discussed  in 
Chapter  VII,  "The  Impending  German  Monetary  Collapse." 
As  a  practical  matter,  moreover,  there  is  no  use  in  attempt- 
ing to  stabilize  these  currencies  at  some  new  parity  with 
gold,  that  is  to  say,  to  redeem  50  paper  marks,  or  1,000 
paper  kronen,  or  50,000  paper  rubles  in  one  gold  mark,  gold 
krone,  or  gold  ruble,  and  then  again  reissue  them.  The  huge 
volume  of  outstanding  currency  should  not  be  retained  by 
any  process  of  redemption  and  reissue.  The  illimitable 
quantities  of  worthless  paper  should  be  destroyed  in  car- 
load lots,  and  with  it  should  be  obliterated  the  whole  tangle 
of  artificial  financial  values  that  has  grown  up  during  and 
since  the  war. 

In  all  of  these  countries  there  must  be  a  virtual  repudia- 
tion of  the  whole  mass  of  bank  note,  government  bond,  and 
other  obligations.  The  entire  situation  is  so  utterly  ficti- 
tious and  so  utterly  impossible  of  control  that  there  can 
be  no  stability  and  certainty  in  business  and  financial  affairs 
until  after  the  slate  has  been  wiped  clean  and  a  new  start 
has  been  made.  There  are  difficulties  and  consequences  stag- 
gering to  the  thought  in  repudiating  the  enormous  volume  of 
paper  currency  in  the  nations  of  eastern  Europe.  Neverthe- 
less repudiation  is  the  lesser  of  evils  and  in  the  end  it  will  be 
found  the  only  way  out  for  these  nations.  There  is  nothing  to 
be  gained  and  everything  to  be  lost  by  prolonging  the  agony. 


THE  WAY  OUT  343 

Repudiation  need  not,  however,  be  absolute.  It  would 
no  doubt  be  wise  to  redeem  outstanding  obligations  at  the 
rate  of  50,  or  100,  or  500,  or  1,000,  or  10,000  to  one,  the 
proportion  varying  of  course  with  the  amount  of  paper  cur- 
rency outstanding  in  different  countries.  Bear  in  mind 
that  this  suggestion  of  redemption  differs  from  the  one 
above;  for  it  involves  cancellation  after  redemption  in- 
stead of  reissue.  It  will  be  seen  that  while  individual 
wealth  as  expressed  in  terms  of  currency  will  thus  be 
scaled  down  enormously,  prices  will  also  be  scaled  down, 
and  hence  standards  of  living  will  not  be  directly  affected. 

In  this  connection  it  may  be  interesting  to  recall  that  at 
the  time  of  the  formation  of  the  United  States  government, 
Alexander  Hamilton,  as  Secretary  of  the  Treasury,  under- 
took the  redemption  of  the  outstanding  colonial  paper  issues, 
a  legacy  from  the  Revolutionary  War,  at  a  rate  of  100  to  i. 
Only  a  very  small  percentage  of  the  total  was  ever  actually 
presented  for  redemption  in  specie.  This  would  undoubtedly 
be  the  case  in  the  nations  of  eastern  Europe  at  the  present 
time. 

So  far  as  Italy,  France,  Belgium,  and  Great  Britain  are 
concerned,  repudiation  of  outstanding  government  and  bank 
obligations  is  doubtless  unnecessary,  provided  certain  other 
measures  are  adopted.  We  found  in  Chapter  VI,  "The 
European  Monetary  Situation,"  that  bank  reserves  in  these 
countries  are  very  low  as  compared  with  pre-war  times,  and 
that  with  the  exception  of  Great  Britain  a  return  to  specie 
payments,  in  the  absence  of  world  financial  co-operation, 
is  practically  impossible,  at  least  for  a  great  many  years  to 
come.  If  the  gold  standard  is  to  be  restored  in  these  coun- 
tries, it  is  necessary  to  work  out  some  plan  of  international 
action  whereby  their  gold  reserves  may  be  replenished. 

This  is,  of  course,  also  true  of  the  nations  east  of  the 
Rhine.    After  the  huge  mass  of  present  outstanding  paper 


344  REMEDIES— PROPOSED  AND  REAL 

currency  is  obliterated,  new  paper  issues  will  have  to  be  made 
on  the  basis  of  adequate  gold  reserves,  in  which  the  paper 
will  be  redeemable.  One  of  the  outstanding  tasks  of  the 
world  today,  therefore,  is  to  redistribute  the  world's  gold 
supply  in  such  a  way  as  to  make  possible  the  restoration  of 
the  gold  standard  in  all  of  the  leading  nations. 

Redistribution  of  Gold  Supply  Since  19 14 

To  understand  why  a  redistribution  of  the  world's  gold 
supply  is  now  required,  one  must  appreciate  the  effects  of  the 
war  upon  the  allocation  of  gold  among  the  leading  com- 
mercial nations  of  the  world.  Before  the  war  the  world's 
gold  supply,  as  a  result  of  trading  and  financial  operations 
extending  over  many  years,  had  come  to  be  distributed 
among  commercial  nations  in  rough  proportion  to  their 
relative  needs,  that  is  to  say,  in  proportion  to  their  relative 
commercial  importance.  The  accompanying  diagram  in- 
dicates the  distribution  of  the  world's  gold  supply  on  January 
I,  1 9 14,  and  again  on  January  i,  191 7. 

The  relative  sizes  of  the  several  rectangles  in  the  diagram 
below  the  normal  gold  level  line  indicate  the  relative  share 
of  the  total  gold  supply  that  each  nation  possessed  in  1914. 
The  shaded  areas  below  the  normal  gold  level  line  indicate 
the  percentage  decrease  in  the  gold  supply  of  belligerent 
countries  shown  in  191 7,  while  the  shaded  areas  above  the 
normal  gold  level  line  indicate  the  percentage  increase  in  the 
gold  supply  of  neutral  countries  shown  in  the  same  year. 
From  January  i,  191 7,  until  the  end  of  the  war,  there  was 
relatively  little  change  in  the  distribution,  for  the  reason  that 
embargoes  were  placed  upon  gold  exports  by  all  the  leading 
European  countries.  * 


*  The  liberal  use  of  gold  as  a  means  of  purchasing  war  materials  in 
neutral  countries  was  threatening  to  undermine  completely  the  European 
monetary  system;  hence  the  embargo  and  the  resort  to  borrowing. 


THE  WAY  OUT 


345 


Sm*riint 


I         Jiaaiit 


3+96? 


1  ^>rj{jer/-ffK/-*-Q3Z 


I     Mtttt^^Jtrxas' 


World  Gold  Distribution  in  191 4  and  1917 


346  REMEDIES— PROPOSED  AND  REAL 

Some  Important  changes  have  occurred  since  the  war. 
Germany  has  lost  more  than  half  of  the  gold  supply  which 
she  possessed  at  the  time  of  the  Armistice;  and  Russia  has 
probably  lost  the  greater  portion  of  her  supply.  In  1919  the 
United  States  had  a  large  outflow  movement,  mainly  to 
South  America  and  the  Orient;  but  in  1920  the  tide  turned 
and  we  have  since  had  a  large  monthly  inflow  from  nearly 
all  quarters  of  the  globe.  During  the  current  year  (1921) 
the  importations  of  gold  have  been  enormous,  amounting 
from  January  i  to  September  10,  to  $509,907,516.  A  golden 
flood  has  swept  into  the  country,  like  that  of  191 6,  when 
Europe  was  parting  with  her  gold  supply  in  the  purchase  of 
indispensable  war  materials.  With  gold  coming  to  the 
United  States  at  the  rate  of  $750,000,000  annually,  it  would 
require  only  about  eight  years  completely  to  denude  Europe 
of  gold. 

Return    of    Gold    to    Europe    through    International    Co« 
operation 

One  of  the  most  sinister  factors  in  the  world  international 
situation  at  the  present  time  is  this  continuous  outpouring  of 
gold  from  Europe.  While  most  of  the  commercial  and  some 
of  the  financial  press  of  the  United  States  have  been  point- 
ing to  the  increase  in  our  gold  supply  as  a  favorable  factor 
in  the  American  situation,  it  has  all  the  time  been  one  of  the 
most  unfavorable  of  symptoms.  The  inflow  does  not  do  the 
United  States  any  direct  good.  The  gold  is  steadily  piling 
up  as  excess,  unnecessary  reserve  money  in  the  vaults  of  our 
banking  institutions.  The  only  way  in  which  it  may  be  said 
to  have  been  helpful  to  us  is  through  alleviating  the  tempor- 
ary banking  strain  of  last  year  and  in  easing  interest  rates. 
On  the  other  hand,  the  loss  of  this  gold  supply  has  meant 
continuous  financial  deterioration  in  European  nations.  It 
has  tended  to  depreciate  further  the  paper  currencies  of  the 


THE  WAY  OUT  347 

countries  involved,  and  it  has  postponed  the  day  when  these 
nations  could  hope  to  resume  specie  payments. 

Before  a  restoration  of  specie  payments  can  be  accom- 
plished, the  gold  tide  must  set  in  the  opposite  direction. 
Germany,  Austria,  Russia,  Great  Britain,  France,  Italy,  and 
other  belligerent  countries  must  have  their  gold  reserves  re- 
plenished. This  gold  must  come  from  the  United  States 
and  the  neutral  countries,  which  now  hold  such  dispropor- 
tionate quantities  of  the  total  world  supply.  Under  normal 
processes,  nations  whose  stocks  of  gold  are  depleted  can 
replenish  their  reserves  only  by  maintaining  an  excess  of 
exports  over  imports,  the  balance  being  paid  by  shipments 
of  gold.  In  case  international  debts  and  indemnities  of  huge 
proportions  are  allowed  to  stand  in  the  balance  against  the 
belligerent  countries  of  Europe,  the  exports  of  these  coun- 
tries would  of  course  have  to  exceed  their  imports  by  more 
than  the  annual  amount  of  the  indemnity  and  interest 
charges,  before  they  would  receive  a  net  inflow  of  gold. 
This  consideration  is  an  added  argument  for  the  cancel- 
lation of  inter- Allied  debts  and  indemnities. 

These  normal  processes  are,  however,  too  slow  to  accom- 
plish the  ends  desired.  International  trade  and  international 
finance  must  be  quickly  restored  if  further  economic  disin- 
tegration is  to  be  avoided.  The  practically  worthless  cur- 
rencies of  central  and  eastern  Europe  must  be  virtually 
repudiated,  and  the  outstanding  issues  of  the  nations  of  west- 
ern Europe  must  be  reduced  by  further  commercial  liquida« 
tion  and  held  in  check  by  the  balancing  of  budgets.  When 
this  is  done  an  early  return  to  specie  payments  may  be 
effected  through  international  financial  co-operation,  whereby 
a  redistribution  of  the  world's  gold  supply  is  made  in  accord- 
ance with  the  monetary  requirements  of  nations.  In  this 
connection,  Secretary  Hoover  and  Comptroller  of  the  Cur- 
rency Crissinger  have  both  recently  suggested  some  form  of 


348  REMEDIES— PROPOSED  AND  REAL 

international  co-operation  among  the  great  central  banks 
of  the  world,  whereby  the  gold  supply  may  be  pooled  for  the 
benefit  of  the  commercial  and  financial  world  as  a  whole. 

Two  methods  of  accomplishing  the  end  desired  may  be 
suggested.  One  is  to  establish  an  international  reserve  bank, 
whose  duty  it  would  be  to  maintain  the  redemption  of  all 
national  currencies  in  gold.  A  second  method  would  be  to 
ask  the  United  States  and  neutral  nations  having  excess 
gold  to  give  or  loan  this  gold  to  the  nations  requiring  it. 
Details  need  not  be  here  considered.  It  is  enough  to  suggest 
that  some  such  means  must  be  devised  to  secure  the  neces- 
sary gold  redistribution. 

It  remains  to  be  added  that  such  a  redistribution  of  the 
world's  gold  would  accomplish  nothing  if  it  were  attempted 
as  an  isolated  program  of  action.  It  could  not  possibly  prove 
successful  so  long  as  European  currencies  and  European 
budgets  are  in  their  present  condition.  Nor  could  it  be  suc- 
cessful if  initiated  through  private  agencies  alone.  Private 
programs  of  international  financial  co-operation  of  any 
kind  always  break  on  the  rock  of  European  politics.  A 
program  of  economic  co-operation  can  only  hope  to  be 
successful  if  it  is  part  of  a  program  of  political  co-operation. 

IV.     National  Budgets  Must  Be  Balanced 

Reduction  of  Expenditures  Only  Practical  Means 

We  come  now  to  the  very  heart  of  the  problem  of  Euro- 
pean rehabilitation.  We  have  seen  that  expenditures  in 
every  continental  belligerent  country  are  far  in  excess  of 
receipts,  that  neutral  nations  are  no  longer  living  within  their 
means,  and  that  even  Great  Britain  will  this  year  have  a 
substantial  deficit.  It  has  been  made  clear,  moreover,  that 
persistently  unbalanced  budgets  will  in  time  wreck  the  entire 
financial  and  economic  system.    If  Europe  is  to  revive,  gov- 


THE  WAY  OUT  349 

ernment  deficits  must  be  eliminated — government  expendi- 
tures and  taxation  receipts  must  be  made  to  balance  or  chaos 
will  in  the  end  result. 

We  may  as  well  recognize  once  and  for  all  that  taxes  can- 
not be  materially  increased  so  long  as  present  conditions 
prevail.  Economically,  the  people  cannot  stand  it ;  and  politi- 
cally, they  will  not.  If  economic  conditions  improve  in 
consequence  of  the  fulfilment  of  a  program  of  reconstruction, 
the  total  of  taxation  receipts  may,  however,  be  raised  with- 
out increasing  the  burden  on  the  people.  But  as  things  now 
stand,  the  only  practical  means  of  balancing  budgets  lies 
in  reducing  expenditures. 

That  they  must  be  drastically  reduced  is  apparent  from 
the  budgetary  figures  presented  in  Chapter  V.  For  con- 
venience we  may  summarize  here  the  estimated  figures  for 
France,  Belgium,  and  Germany  in  1921.  They  are  as 
follows :  ^ 

(000,000  omitted) 

Expenditures        Receipts  Deficit 

France      (francs)     46,321  23,262  23,059 

Belgium  (francs)    9,689  S,io8  4,581 

Germany  (marks)    1 10,200  40,000  70,200 

The  1920  estimates  for  other  continental  countries  will 
be  found  on  page  56. 

It  will  be  seen  that  expenditures  must  everywhere  be  cut 
to  the  bone.  Concretely,  on  the  basis  of  the  relatively  favor- 
able figures  of  1920,®  Italy  must  eliminate  roughly  two- 
thirds  of  her  government  expenditures ;  Germany  two-thirds ; 
Poland  80  per  cent ;  France  50  per  cent ;  Switzerland  30  per 


=  See  discussion  of  figures  for  all  three  countries  on  pages  49-56. 
•The  1921  figures,  it  may  be  recalled,  will  m  general  be  much  worse 
than  those  of  1920. 


350  REMEDIES— PROPOSED  AND  REAL 

cent;  Spain  20  per  cent;  Holland  15  per  cent;  etc.    It  is 
clear  enough  that  no  minor  economies  will  suffice. 

Detailed  and  reliable  classifications  of  expenditure  in  the 
various  continental  countries  are  not  available.  We  may, 
however,  compile  a  table  for  some  of  the  leading  countries 
which  will  indicate  with  rough  accuracy  the  chief  items  of 
expenditure.    The  data  are  taken  from  a  variety  of  sources. 

Debt    and    Armament    Expenditures    of    Leading    European 

Countries 

(000  omitted) 

Interest 

on  Debt  Army  Navy 

France  $1,071,429  $414,286  $60,000 

United    Kingdom 1,411, 500  525.400  303.400 

Italy   200,000  16,160  9,200 

Total  Debt  Percentage 

and  Armament  Total  of  Total 

Expenditures        Expenditures  Expenditures 

France    $i,545,7i5  $3,308,643  47 

United  Kingdom 2,240,350  4,421,500  50 

Italy   225,360  1,138,000  20 

Pensions  should  be  added  to  these  figures  to  ascertain  the 
totals  expended  on  past  and  present  wars.  We  have,  how- 
ever, been  unable  to  secure  the  data  on  pensions  for  all  the 
countries  involved.  In  France  the  pensions  amount  to  3,650,- 
000,000  francs  a  year,  and  in  England  to  £137,000,000.  A 
good  portion  of  the  remaining  expenses — a  very  large  per- 
centage in  Italy  and  in  nations  east  of  the  Rhine — went 
for  subsidies  of  one  sort  or  another,  designed  to  keep  in- 
dustry alive  and  prosperous.  An  indirect  form  of  pension 
is,  moreover,  found  in  the  padding  of  government  pay-rolls 
for  the  purpose  of  taking  care  of  deserving  and  needy  per- 
sons not  otherwise  provided  for.  These  items  are,  of  course, 
all  direct  heritages  of  the  war.    If  added  to  the  above  they 


THE  WAY  OUT  35 1 

would  doubtless  bring  the  amount  expended  on  past  and 
future  wars  up  to  75  or  80  per  cent  of  the  total. 

Data  for  the  United  States  are  more  complete.  The  fol- 
lowing table  shows  the  distribution  of  our  expenditures  in 
1920:  "^ 

Distribution  of  United  States  Expenditures,  1920 

1.  Past  Wars  $3,855,482,586=  68% 

2.  Future    Wars    1,424,138,677=  25% 

3.  Civil  Departments  181,087,225  =  3% 

4.  Public    Works    168,203,557=  3% 

5.  Research,  Education,  and  Health 57,093,661  =  1% 

$5,686,005,706  =  100% 

Other  compilations  vary  slightly  from  this;  but  the 
figures  may  be  taken  as  approximately  correct. 

Disarmament  Imperative 

It  is  apparent  from  the  foregoing  tables  that,  if  sub- 
stantial reductions  of  expenditures  are  to  be  made,  we  must 
attack  the  items  for  past  and  future  wars.  A  little  may  be 
lopped  off  here  and  there  in  administrative  departments; 
but  if  such  expenditures  were  entirely  eliminated  it  would 
make  but  slight  impression  upon  the  staggering  totals. 

As  regards  past  wars,  pensions  might  perhaps  be  re- 
duced somewhat,  particularly  if  prices  decline  from  the 
present  high  levels.  Interest  rates  on  government  debts  may 
also  be  reduced  through  refunding  operations.  We  have 
already  suggested  that  in  the  nations  east  of  the  Rhine 
domestic  government  bonds,  along  with  paper  money,  should 
be  largely  eliminated  through  a  process  of  redemption  at 
some  nominal  rate.  It  may  be  that  similar,  though  less 
drastic,  measures  will  be  necessary  in  some  of  the  Allied 

'Analysis   made   by   Dr.   Edward   B.    Rosa,   of   the   United   States 
Bureau  of  Standards. 


352  REMEDIES— PROPOSED  AND  REAL 

belligerents;  but  in  any  event  the  rate  of  interest  must  be 
reduced.  The  more  prices  fall,  the  greater,  of  course,  be- 
comes the  necessity  of  scaling  down  government  fixed 
charges. 

The  difficulties  and  the  practical  limitations  involved  in 
scaling  down  pensions  and  debts  are  very  great,  however; 
and  in  any  case  they  do  not  go  to  the  root  of  the  problem. 
While  reducing  interest  and  pensions  reduces  government 
exchanges,  it  also  reduces  the  monetary  income  of  pen- 
sioners and  bondholders,  and  thus  reduces  tax-paying 
ability.  The  one  real  opportunity  for  balancing  budgets 
lies  in  striking  at  the  expenditures  incurred  in  maintaining 
existing  armies  and  navies  and  in  preparing  for  future 
wars. 

The  following  table  indicates  the  extent  to  which  the 
burden  of  militarism  has  increased  since  the  Great  War : 

Growth  of  Armaments  After  War^ 

(coo  omitted) 

Army  Navy 

Country  1912  1921*  1912                1921* 

Belgium    $13,119  $    107,823  No  Navy 

France    177,656  1,148,331**  $81,693          $167,799** 

United   Kingdom..  134.850  710,713!  216,194           410,605 

Italyt    83,284  80,815  41-859             45-712 

Japan  47,o66§  106,285  46,5io§          176,072 

United  States  107,787  77i,S30  136,390           651,222 

•  Values  of  foreign  money  are  calculated  in  dollars  on  a  gold  basis,  as  most  nearly 
representing  the  burden  upon  the  populations  affected. 

*•  Figures  for  year  1920. 

t  Including  air  force. 

I  Figures  for  fiscal  years  1912-1913  and  1919-1920. 

I  Figures  for  fiscal  year  1912-1913. 

With  due  allowance  for  changes  in  the  level  of  prices, 
in  every  important  country  except  Italy  the  burden  of  arma- 

*  From  "The  Staggering  Burden  of   Armament,"  published  by  the 
World  Peace  Foundation,  April,  1921,  Vol.  IV,  No.  2,  page  219. 


THE  WAY  OUT  353 

ment  has  been  enormously  increased.  The  appalling  truth 
is  that  this  is  occurring  while  every  nation  of  Europe  is 
either  staggering  under  the  load  of  taxation  or  else  incur- 
ring huge  annual  deficits  that  threaten  the  early  demoraliza- 
tion of  the  whole  financial  and  economic  system.  Recall 
in  this  connection  the  analysis  in  Chapter  X,  of  the  effects 
of  the  British  tax  burden  upon  the  curtailment  of  invest- 
ments and  the  depreciation  of  existing  plant  and  equipment. 
Recall  the  analysis  in  the  same  chapter  of  the  process  of 
financial  and  economic  deterioration  that  results  from 
persistent  fiscal  deficits.  In  the  very  face  of  imminent  and 
far-reaching  economic  disaster,  the  nations  of  Europe,  as 
well  as  Japan  and  the  United  States,  go  on  increasing  mili- 
tary expenditures.  Europe  as  a  whole  now  has  larger 
armies  than  before  the  war,  notwithstanding  the  substantial 
demobilization  of  the  German  forces.  The  race  for  naval 
supremacy  by  the  substitution  of  new  contestants  has  mean- 
while been  accelerated. 

As  late  as  October,  1921,  with  the  French  fiscal  situa- 
tion a  matter  of  the  gravest  concern,  the  French  Minister  of 
War,  with  the  support  of  the  Premier,  requests  91,000 
additional  men  for  the  army  of  Morocco,  51,000  fresh 
troops  for  the  army  in  the  Levant,  involving  total  expendi- 
tures of  927  million  francs.  To  these  new  expenditures 
must  be  added  50  million  francs  for  the  work  of  the  French 
High  Commissioner  in  the  Levant,  not  to  mention  the  cost 
of  the  Corps  of  Occupation  at  Constantinople. 

The  real  danger  in  Europe  today  is  not,  as  French  and 
British  diplomacy  conceives,  the  danger  of  military  aggres- 
sion of  one  nation  against  another;  but  it  is  the  danger  of 
national  bankruptcy  and  consequent  economic  and  social 
disintegration  for  all  of  them.  It  may  be  possible  that  in 
the  conflict  between  economic  need  and  military  diplomacy, 
the  latter  will  win;  if  it  does,  the  financial  bankruptcy  of 


354  REMEDIES— PROPOSED  AND  REAL 

nations  will  be  inevitable.  The  drain  of  military  preparation 
has  always  been  a  serious  preventive  to  progress.  In  the 
present  situation  it  cannot  continue  without  absorbing  the 
national  savings,  which  should  go  into  the  maintenance  and 
extension  of  national  plant  and  equipment.  If  in  the  next 
few  years  we  are  to  see  nations  inspired  to  action  by  bitter 
nationalist  hatreds,  and  led  by  ignorant  or  unprincipled 
statesmen,  arrayed  against  each  other  in  arms,  nothing  but 
decadence  lies  before  us. 

Disarmament — thorough-going  reduction  of  the  naval 
and  military  establishments  of  the  world — is  the  only  certain 
means  of  preventing  far-reaching  economic  and  social  dis- 
aster. No  mere  curtailment  of  the  rate  of  increase  of 
armaments,  or  limitation  of  military  expenditures  to  their 
present  appalling  totals,  will  suffice  to  balance  European  bud- 
gets and  place  the  world  once  more  on  the  highroad  to  eco- 
nomic prosperity.    Disarmament  is  an  imperative  necessity. 

The  road  to  disarmament  lies  through  Paris.  Unless  and 
until  France  is  given  some  sort  of  genuine  assurance  that 
she  is  not  to  be  left  to  the  mercy  of  a  revengeful  Germany, 
there  can  be  no  general  reduction  of  military  expenditures 
in  Europe.  An  association  of  nations  alone  will  make 
possible  any  effective  guarantees,  and,  in  consequence,  any 
substantial  alleviation  of  the  burden  of  militarism. 

Elements  of  the  Problem 

Summary  of  Reconstruction  Program 

Following  this  analysis  of  the  numerous  issues  involved 
in  a  program  of  world  reconstruction,  it  will  help  to  an 
understanding  of  the  problem  as  a  whole  if  we  now  draw 
up  in  summary  form  the  requirements  of  the  situation  and 
the  policies  that  must  be  pursued  by  Europe  and  the  United 
States. 


THE  WAY  OUT  355 

I.  The  Fundamental  Economic  Requirements 

1.  Domestic  production  must  be  increased  in  every 

country. 

2.  Balanced  international  trade  must  be  restored. 

3.  The  gold  standard  must  be  restored. 

4.  National  budgets  must  be  balanced. 

II.  What  Europe  Must  Do 

1.  Reduce   reparation    demands   and    cancel   inter- 

European  war  debts. 

2.  Eliminate  the  tariff  and  trade  barriers  set  up  in 

the  new  countries  of  central  and  eastern  Europe, 
and  restore  international  transportation  routes. 

3.  Reduce  tariff  and  trade  restrictions  in  western 

Europe,  and  abandon  governmental  support  to 
national  combinations  for  export  trade  and 
foreign  exploitation. 

4.  Repudiate  the  vast  bulk  of  the  issues  of  paper 

currency  and  domestic  bonds  in  central  and 
eastern  Europe,  and  reduce  the  paper  circula- 
tion in  the  nations  of  western  Europe. 

5.  Balance  national  budgets  in  all  European  coun- 

tries, through  a  reduction  of  interest  charges  on 
government  debts,  governmental  economy,  and 
especially  disarmament. 

III.  What  the  United  States  Must  Do 

1.  Cancel  Allied  debts  to  the  United  States  govern- 

ment. 

2.  Lower  our  own  tariff  duties. 

3.  Cofitribute  a  portion  of  our  gold  reserve  for  the 

restoration  of  the  gold  standard  in  Europe. 

4.  Make  some  additional  loans   for  purely  recon- 

structive purposes. 
q.  Reduce  armaments. 


356  REMEDIES— PROPOSED  AND  REAL 

Measures  of  Compulsion 

It  will  be  apparent  that  the  United  States  is  in  a  posi- 
tion to  exert  great  influence  upon  Europe  for  the  accomplish- 
ment of  ends  desired.  There  should  be  no  necessity  for 
exerting  pressure  for  the  purpose  of  saving  Europe  from 
destruction.  But  so  powerful  is  the  grip  of  European  tradi- 
tions, and  so  lacerated  are  the  wounds  of  war,  there  is  little 
hope  that  Europe  will  without  some  measure  of  outside 
compulsion  adopt  a  co-operative  program  of  reconstruction. 
Concretely,  the  United  States  may  exert  pressure  through  the 
following  economic  weapons : 

1.  That  portion  of  the  European  debt  to  the  United 

States  which  was  not  incurred  for  the  purposes 
of  the  Great  War. 

2.  The  gold  supply  needed  by  Europe. 

3.  Further  loans  for  European  reconstruction. 

These  may  be  regarded  as  constructive  weapons.  There 
are,  moreover,  certain  destructive  lines  of  action  at  our  com- 
mand which  may  also  be  utilized  to  compel  international 
co-operation : 

1.  We  may  lend  the  support  of  our  government  to  ex- 

port trade  combinations  and  enter  whole-heart- 
edly into  the  game  of  territorial  exploitation. 

2.  We  may  go  in  for  imperialism  and  world  military 

control. 

3.  We  may  isolate  ourselves  by  the  imposition  of 

prohibitive  tariff  duties,  leaving  Europe  to  stew 
in  her  own  grease. 

While  these  retaliatory  measures  present  a  grim  alterna- 
tive to  a  program  of  constructive  international  action,  one 
can  conceive  of  a  European  attitude  which  would  make  them 
the  only  practical  policy.     If  the  present  tendency  toward 


THE  WAY  OUT  357 

international  chaos  continues,  it  may  well  be  argued  that  we 
should  cut  adrift  from  the  sinking  ship  and  attempt  to  save 
ourselves  as  best  we  may. 

An  Association  of  Nations  Required 

So  much  for  the  requirements  of  the  situation — for  the 
things  that  Europe  must  do,  for  the  things  that  we  must 
do,  and  for  the  influence  which  our  position  of  power  in  the 
world  now  gives  us.  In  the  nature  of  things  we  can  here 
present  only  the  elements  of  the  problem.  The  details  of  a 
program  of  reconstruction  must  be  worked  out  by  the  states- 
men of  the  world  who  are  now  in  positions  of  administrative 
responsibility. 

It  may  be  pointed  out,  however,  that  there  is  no  pos- 
sibility of  accomplishing  the  ends  desired  without  an 
association  of  nations.  The  purely  economic  policies  de- 
manded cannot  be  administered  without  an  effective  interna- 
tional organization.  Concretely,  we  must  have  what,  for 
lack  of  a  better  name,  may  be  called  an  International  Tariff 
and  Trade  Commission.  We  must  have  an  International 
Reserve  Board.  We  must  have  an  International  Committee 
for  Credit  Allocation.  We  must  have  a  Committee  on  Bud- 
getary Control.  We  must  have  a  Committee  on  Disarma- 
ment. Experience  will  show,  moreover,  that  we  must  have 
various  and  sundry  other  committees  to  deal  with  the 
problems  of  exchange,  of  transportation,  etc. 

We  have  said  that  we  must  have  an  association  of 
nations.  We  hold  no  brief  for  the  existing  League  of 
Nations,  especially  since  it  is  irrevocably  tied  to  war  settle- 
ments which  the  test  of  time  has  proved  to  be  as  vicious  as 
they  are  unworkable.  Nor  do  we  care  in  the  slightest  what 
name  is  given  to  such  an  association.  All  that  we  insist  upon 
is  that  world  rehabilitation  requires  international  organiza- 
tion and  administration. 


358  REMEDIES— PROPOSED  AND  REAL 

We  recognize  that  many  people  will  say  that  an  associa- 
tion of  nations  and  the  accomplishment  of  the  ends  which 
we  propose  is  impossible  and  visionary  with  human  nature 
what  it  is.  Is  not  super-government  abhorrent  to  the  funda- 
mental tenets  of  society  ?  It  is  undoubtedly  just  as  abhorrent 
and  just  as  impossible  of  attainment  as  was  the  formation 
and  maintenance  of  the  American  nation  out  of  a  group  of 
widely  scattered  colonies  composed  of  different  racial 
elements  and  of  divergent  economic  interests.  It  is  just  as 
abhorrent  and  impossible  of  attainment  as  was  the  welding 
of  the  German  Empire  out  of  the  disunited  and  belligerent 
states  and  principalities  which  at  the  middle  of  the  last 
century  made  up  central  Europe  from  the  Alps  to  the  North 
Sea.  It  is  just  as  impossible  and  just  as  abhorrent  as  the 
evolution  of  the  empire  of  the  Czar  out  of  the  discordant 
Slavic  and  Tartar  tribes  which  straggled  across  the  wastes  of 
eastern  Europe.  It  is  just  as  abhorrent  and  just  as  impos- 
sible as  the  formation  of  the  Swiss  federation  composed  of 
French,  Italian,  and  German  racial  units.  It  is  just  as 
abhorrent  and  impossible  as  these  developments  and  no  more 
so.  The  truth,  of  course,  is  that  history  is  largely  a  record 
of  the  amalgamation  of  peoples  and  races  into  ever  larger 
political  organizations. 

It  should  be  clearly  understood,  however,  that  a  workable 
association  of  nations  does  not  require  a  surrender  of 
national  sovereignties  and  the  erection  of  a  superstate.  All 
that  is  required  is  the  development  of  international  ma- 
chinery for  the  purpose  of  administering  policies  agreed  to 
by  nations,  in  their  sovereign  capacities,  which  cannot  be  exe- 
cuted by  nations  acting  independently  of  each  other.  An 
association  of  nations  is,  therefore,  merely  an  instrumentality 
through  which  the  real  desires  of  the  world  for  international 
co-operation  can  find  expression  and  be  given  practical 
effect. 


THE  WAY  OUT  359 

Campaign  of  Education  Needed 

It  will  be  insisted,  however,  that  in  view  of  the  present 
psychology  of  peoples  and  nations  an  international  associa- 
tion of  any  sort  is  impossible.  "Peoples  still  think  in 
nationalistic  terms."  While  the  truth  of  this  statement  can- 
not be  doubted,  it  does  not  follow  that  popular  psychology 
never  changes.  What  is  the  impossibility  of  today  may 
become  the  actuality  of  tomorrow,  either  through  the  irre- 
sistible trend  of  events  or  from  the  dynamic  strength  of 
great  leadership.  Already,  as  we  have  seen,  the  pressure  of 
European  impoverishment  is  influencing  the  policies  of  the 
foreign  offices  of  Great  Britain  and  Italy,  if  not  yet  of 
France.  Already  the  grim  logic  of  economic  events  is  forc- 
ing the  United  States  into  the  arena  of  world  affairs,  through 
back  alleys  if  not  over  the  broad  highway. 

The  first  step  in  carrying  out  any  program  of  reorganiza- 
tion must  be  a  campaign  of  education,  both  in  Europe  and 
the  United  States.  European  peoples  must  be  made  to 
understand  the  fundamental  requirements  of  the  situation. 
They  must  be  made  to  realize  that  only  through  interna- 
tional co-operation  can  economic  and  social  disintegration 
be  avoided.  The  people  of  the  United  States  must  also  be 
made  to  appreciate  the  fundamental  dependency  of  American 
prosperity  upon  the  balance  sheet  of  Europe.  They  must  be 
educated  to  a  point  where  they  will  demand  of  the  American 
government  a  whole-hearted  participation  in  a  constructive 
program  of  international  reconstruction,  worked  out  through 
an  association  of  nations. 

The  task  belongs,  in  fact,  to  the  spirit  of  liberalism 
throughout  the  world.  Shaken  to  its  very  foundations 
during  the  war  and  trampled  under  the  cloven  hoof  of  post- 
war reaction  and  decadence,  liberalism  must  arise  again  to 
lead  in  this  crusade  of  economic  and  political  enlightenment. 
A  world-wide  campaign  of  education  and  publicity  is  a 


36o  REMEDIES— PROPOSED  AND  REAL 

necessity.  The  truth  about  the  economic  plight  of  the  world 
must  be  driven  home  to  the  masses  of  men  and  women  every- 
where. If  we  are  to  escape  the  cancerous  decay  which  is 
now  consuming  the  cell  structure  of  society,  the  facts  must 
be  disclosed,  with  nothing  hidden,  nothing  perverted,  nothing 
exaggerated.  Everyone  must  be  brought  to  realize  that  the 
world  is  vastly  poorer  than  before  the  war,  and  that  nations 
cannot  continue  to  live  beyond  their  means  without  wrecking 
the  economic  organization  of  society.  They  must  be  brought 
to  understand  that  against  the  forces  of  national  disintegra- 
tion there  must  be  marshaled  the  forces  of  international  co- 
operation. This  is  not  a  task  for  statesmen  alone;  it  calls 
for  the  determined  support  of  the  press  and  the  pulpit  in 
every  land. 

Fearless  Leadership  Required 

We  cannot  accept  the  view  of  the  man  high  in  the 
councils  of  Europe,  who  admits  that  the  process  of  decay 
has  fastened  itself  so  fundamentally  on  the  world  that  the 
cancerous  growth  can  be  removed  only  by  cutting  at  the  very 
foundations  of  society;  and  yet  argues  that  even  if  the 
people  knew  the  facts  they  would  be  unwilling  to  abandon 
their  narrow  nationalist  prejudices  and  set  to  work  on  a 
program  of  international  reconstruction.  We  believe  that 
there  is  always  in  the  body  politic  a  great  reserve  of  willing 
strength  which  will  respond  to  leadership  inspired  by  lofty 
ideals  and  rooted  in  truth  and  understanding.  Throughout 
this  critical  era  which  has  called  aloud  for  intelligent  and 
courageous  leadership,  one  of  the  most  disheartening 
phenomena  is  the  never  failing  willingness  of  statesmen  to 
shift  the  burden  of  responsibility  to  the  people. 

In  the  past,  peoples  have  been  governed  by  national 
ideals,  and  they  have  ever  been  found  ready  to  make  generous 
sacrifices  for  the  promotion  of  these  ideals.     Today  the 


THE  WAY  OUT  361 

more  closely  interwoven  relationships  of  nations  require 
a  broader  horizen  than  that  of  nationalism.  Fearless  leader- 
ship must  bring  about  an  understanding  of  the  crying  need 
for  closer  international  co-operation.  Conferences  behind 
closed  doors,  reports  of  experts,  learned  dissertations,  will 
not  suffice  to  enlist  the  spirit  of  men  in  this  great  cause. 
There  is  required  a  vital,  inspired  leadership  to  conduct  a 
campaign  for  fair  and  honest  international  relations  under 
an  association  of  nations.  Such  a  campaign  should  challenge 
the  greatest  leadership ;  for  it  involves  the  welfare  and  happi- 
ness of  everyone  and  the  very  existence  of  millions  of  people. 

This  concludes  all  that  the  authors  have  to  say,  for  the 
present.  Let  him  who  reads  and  doubts  disprove  the  evi- 
dence of  European  decadence  which  threatens  civilization; 
let  him  show  that  American  prosperity  is  not  indissolubly 
linked  with  the  rehabilitation  of  Europe.  Failing  in  this, 
he  must  either  accept  our  constructive  suggestions  or 
formulate  an  alternative  program  of  reconstruction.  In 
either  case  the  purpose  of  the  authors  will  have  been 
accomplished.  ^ 


Date  Due 

PBiNTEo  IN  U.S.A.             CAT.   NO.   24    161               Ew 

A     000  599  011 


